KEY POINTS:
The Reserve Bank has to keep inflation between 1 and 3 per cent, right?
Well, yes and no. Reserve Bank Governor Alan Bollard has a fair degree of flexibility, which is just as well given the number of times annual inflation has been running above 3 per cent
in the past few years.
Figures out from Statistics New Zealand today put the annual rate of Consumers Price Index inflation for the year to March at 3.4 per cent.
That makes the March 2008 quarter the seventh quarter in the past 11 where the annual rate has been above the top of the target band.
In the five quarters between September 2005 and September 2006 the annual rate was above 3 per cent every quarter, peaking at 4 per cent.
Before that there was a run of 16 quarters where the rate was within the target range, going back to the September quarter of 2001 when Don Brash was still governor. Dr Bollard took over in September 2002.
His responsibility is set out in something called a Policy Targets Agreement (PTA) negotiated between the Government and the Reserve Bank.
A new PTA must be negotiated every time a governor is appointed or re-appointed.
The most recent was signed last May and said the Reserve Bank's policy target "shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term".
The PTA pointed out that for a variety of reasons, the actual annual rate of CPI inflation would vary around the medium term trend.
"Amongst these reasons, there is a range of events whose impact would normally be temporary," the PTA said.
"Such events include, for example, shifts in the aggregate price level as a result of exceptional movements in the prices of commodities traded in world markets, changes in indirect taxes, significant government policy changes that directly affect prices, or a natural disaster affecting a major part of the economy."
When disturbances of that kind arise, the Reserve Bank's response should be consistent with meeting its medium term target.
Such disturbances are obviously a big part of the picture right now, given the ramp up in the cost of commodities including oil, wheat and dairy products.
Coming soon will be the Government's emissions trading scheme, which Dr Bollard has warned will cause a significant boost to inflation in 2009 and 2010.
These are disturbing times to be a central bank governor. Maybe the job will get a little easier when the disturbances moderate, or even start helping in the struggle with inflation.
- NZPA