Inflation spectre fading, but may return as economy improves, says Reserve Bank

Reserve Bank acting governor Grant Spencer

The threat of inflation has eased, but it may become a problem again once global markets stabilise, the Reserve Bank of New Zealand said today.

In its annual Statement of Intent, the central bank said the New Zealand economy had been under pressure from the international financial crisis, global recession and weak domestic spending.

"Inflation is less of a concern just now, but may present an important challenge once confidence returns to global markets, given the large amount of liquidity that has been injected into the global system," Reserve Bank acting governor Grant Spencer said.

New Zealand's annual inflation rate has slipped to 3 per cent, at the top of the Reserve Bank's target band, from an 18-year high of 5.1 per cent as recently as the September quarter.

The bank said its focus in the next three years was on the effective operation of financial markets and institutions, and supporting the financing needs of the real economy.

The Reserve Bank continued to develop and implement the new regulatory framework for non-bank deposit takers and insurance companies.

The volatile global economy was having an impact on the central bank's finances.

"As a financial institution with approximately $29 billion in assets, the Bank faces a wide range of financial risks which are carefully managed," said Spencer.

"However, the global financial crisis, together with the Bank's policy responses, have given rise to increased volatility in the Bank's balance sheet and income."

Bank expenditure was forecast to rise to $55.1 million in 2009-10 from $52.1 million.

That increase was mainly due to expanded regulatory responsibilities for non-bank financial institutions, the costs of setting up Auckland office as backup for essential operations in the event of a disaster in Wellington, and depreciation costs for new systems.

The Reserve Bank sliced its Official Cash Rate from 8.25 per cent a year ago to 2.5 per cent as the global crisis hit the economy, with the last cut being a 50-basis point drop at the end of April.

As well as an annual budget, the Statement of Intent outlines the bank's plans for the three years ahead.

- NZPA