RBNZ to continue targeting medium-term inflation

LONDON - New Zealand's Reserve Bank will stick to its goal of targeting inflation on the medium-term horizon, the bank's governor has said, adding that current above-target CPI levels were no reason to sack him.

Consumer price inflation has come in above the Reserve Bank of New Zealand's (RBNZ) one to three per cent target for the last three quarters, most recently hitting 3.3 per cent in January to March this year.

"The policy target specifies the focus must be on inflation in the medium term, so it recognizes that ... from time to time stuff happens," RBNZ Governor Alan Bollard told the Commonwealth Business Council's Global Banking and Finance Forum in London.

Bollard said the current above-target inflation was not a reason to sack the central bank chief. In New Zealand, the governor is individually responsible for setting interest rates, although he consults with others.

High inflation is one reason why the RBNZ may want to keep interest rates on hold at 7.25 per cent for some time to come, rather than cutting them to boost growth, analysts say.

The Reserve Bank raised its official cash rate by 225 basis points between January 2004 and last December, in part in an attempt to cool the housing market.

"In New Zealand, housing prices are very closely related to household spending. So we've been focusing monetary policy more on that than if it were an equities bubble, or any other asset price bubble," Bollard said.

Now though, most analysts expect the next move in interest rates will be a growth-boosting cut, either later this year or in early 2007.

After expanding at about 4 per cent a year over the past five years, the economy effectively stagnated in the second half of 2005. Data for the first quarter of this year showed that growth picked up to a quarterly 0.7 per cent, with the economy avoiding recession.

"We are going through a very strong period of growth ... for the last 7 years although it's now coming off," Bollard said.

The series of rate hikes has attracted yield-seeking investors to New Zealand and sent its currency to a 23-year high at US74.65c to the NZD last year.

This year though, the currency has weakened on concerns about New Zealand's economic imbalances, the prospects of a rate cut and worries about the economic slowdown.

On Thursday, the New Zealand dollar fell more than one per cent on the day to a 10-week low of US61.08c on news that the annual current account deficit ballooned to a wider-than-expected record level of $14.54 billion - or 9.3 per cent of gross domestic product (GDP) - in the first quarter.

"We don't believe we can target the exchange rate through that (monetary policy)," Bollard said. "It would be lovely if we could, but we can't."

- REUTERS