New Zealand has achieved the envy of many nations: stable, near-zero inflation. Yet both prominent commentators and the Reserve Bank’s mandate give the false impression that this is “bad news”.
I regard it as good, not bad.
Once we pierce the shortcomings of the CPI measure of inflation, we would also do well to remember that the Reserve Bank is governed by an Act of Parliament. The bank’s primary objective is to maintain price stability. The legitimate fear was and remains the destructive impact of inflation as a tax on savers and fixed-income earners, particularly retirees. Inflation also generates expenses as people have to adapt to and avoid rising prices, and it impedes planning and investment.
Price stability was originally defined in the first Policy Targets Agreement between the Reserve Bank Governor and the Minister of Finance as CPI inflation within 0 and 2 per cent. The Government widened that range to 0 to 3 per cent in 1996, before raising it further to 1 to 3 per cent in 2002.
There was little justification for the latest change, beyond the misperception that the Reserve Bank was excessively focused on achieving low inflation to the detriment of economic growth. Serious consideration should be given to lowering the target range back to between 0 and 2 per cent, since the Reserve Bank’s current mandate is placing undue pressure on it to cut the OCR.
I agree the original target band of 0% to 2% was a good target which meant a mid-point of 1% was aimed for.