Cullen hints at change to bank inflation target

By BRIAN FALLOW economics editor

Finance Minister Michael Cullen yesterday hinted at changes to the Reserve Bank's inflation target.

In the past he has said he was not calling for a widening of the target band, which was widened from 0-2 to 0-3 per cent in 1996.

Yesterday he said a new policy targets agreement (PTA) had to be negotiated with governor-designate Alan Bollard.

"It would not be helpful to speculate on what the new PTA will look like."

But he added: "I did not rule out a move in the band. I ruled out any change to the upper limit on the band."

That was intended to assure the financial markets that "we are not going mad and are not aiming for inflation in excess of 3 per cent".

The practice of monetary policy should be more in line with the Australian central bank's, he said.

The Australia bank is directed to keep inflation within a 2 to 3 per cent band, on average.

The Bank of New Zealand's head of market economics, Stephen Toplis, said that not only was that a higher target than the New Zealand one but the words "on average" better emphasised the medium-term nature of inflation targeting.

"We think there is a strong chance of a change in the target to 2-3 per cent or even 1-3 per cent."

Although this might be seen as a softening, the bank had effectively been moving towards this stance so any shift in the policy-making process would be minimal.

Toplis said overseas investors believed the bank had been unnecessarily aggressive and might greet with open arms a shift in its stance.

Cullen said he hoped to conclude a new PTA next month.

Bollard said he expected that to be a "straightforward" process, but otherwise was non-committal.

National finance spokesman and former governor Don Brash said any relaxation of the target band would only be a cosmetic change and would not address the long-term growth prospects of the economy.

He said Bollard was an "experienced and competent economist who would handle the role well."

One comment by Cullen yesterday implied that it is not even a given that there will be an inflation target band.

"One point I am prepared to make is there will be no change to the upper limit of the band - if we have a band," he said.

"The alternative is to have a point target. This is a matter for negotiation."

A point target was recommended by Professor Lars Svensson, who conducted an independent review of the bank's operation. That was rejected by Cullen at the time and during the election campaign he was critical of the bank for aiming for the mid-point of the 0-3 per cent band as if it had a target of 1.5 per cent.

The Treasury has the job of advising Cullen on what the PTA should say. Bollard has excluded himself from that process on conflict of interest grounds. He said he was asked to be a candidate for the job. His was the only name the bank's independent directors put forward.

Deutsche Bank chief economist Ulf Schoefisch said that when Cullen was in opposition he was frequently critical of the Treasury.

"He's quite happy with the way Dr Bollard has turned it around," he said.

"Dr Cullen has a similarly sceptical view of the Reserve Bank and the culture there and it may be he feels Dr Bollard is a person who could change the culture."