16 Feb 2010

IMF suggests 4% inflation target

8:43 am on 16 February 2010

The International Monetary Fund has suggested that central banks could raise their inflation targets to as high as 4%, to allow for greater interest rate cuts in times of crisis.

In white paper, IMF chief economist Olivier Blanchard, says the 2% target used by most central banks does not give them enough room to act in a crisis.

Mr Blanchard says a higher inflation target usually results in higher interest rates.

New Zealand's Reserve Bank aims to keep inflation within a 1% to 3% target band, and uses interest rates to boost or slow down the economy when it looks like inflation might reach that target.

But the IMF paper says interest rate cuts were not effective enough during the financial crisis, because they could only cut to zero, forcing central banks and governments to effectively print money through quantitative easing in order to prop up their economies.