30 Jun 2010

Reserve Bank considers more ways to control inflation

11:35 pm on 30 June 2010

The Reserve Bank says it will continue to look into new monetary policy tools, but believes its current focus on inflation is the right one.

The central bank has released its statement of intent, which outlines its policy and operations for the next three years.

In it, Reserve Bank Governor Alan Bollard says he's confident controlling inflation is the right objective for monetary policy.

The Reserve Bank is required by the government to keep consumer inflation between 1% and 3%, which it does by adjusting the Official Cash Rate.

Dr Bollard says, however, that other mechanisms will continue to be investigated in coming years.

Possible new tools are thought to include rules stating how much capital banks can hold at various stages of the economic cycle.

The Labour Party is unhappy with the volatility in the exchange rate which it believes is a result of the exclusive use of the Official Cash Rate rate to control inflation. It thinks the use of other tools could reduce that volatility and take pressure off exporters.

Labour also says monetary policy should focus on objectives other than inflation, such as the exchange rate, but Dr Bollard says he is confident the bank should continue its focus on keeping prices stable.

Sluggish recovery in Europe

Dr Bollard has reiterated that conditions remain fragile and volatile, especially in global funding markets, although New Zealand has emerged from recession in a better shape than most countries.

He says while New Zealand has benefited from stronger growth in its major trading partners in China, Australia and Asia, the recovery remains sluggish in Britain and Europe, and sovereign debt concerns hovering over several European economies are disturbing financial markets.