Labour open to ‘having a discussion’ about changing Reserve Bank rules to tolerate higher inflation, economist calls the idea ‘ludicrous’

Labour's finance spokeswoman Barbara Edmonds. Photo / Marty Melville.

Labour’s finance spokesperson Barbara Edmonds is open to “having a discussion” about changing the Reserve Bank’s inflation target to allow inflation to run hotter.

Currently, the Finance Minister, in consultation with the Reserve Bank, sets a monetary policy committee remit which sets a level of inflation the Reserve Bank should target, primarily using the Official Cash Rate.

That target is 1%-3% with an ideal 2% mid-point at the moment. Recently, there has been a debate about whether the bank should be allowed to target a higher 2.5% midpoint.

When inflation targeting was first introduced in New Zealand in the early 1990s, the target range was just 0%-2%.

“It’s a debate and a discussion that does need to be had,” Edmonds said.

“I’d be open to hearing from other economists as to what they think,” Edmonds said.

Finance Minister Nicola Willis said the idea was “not on our agenda”.

“Low inflation is the key to keeping price increases down,” Willis said.

The idea entered the political bloodstream after Westpac Chief Economist Kelly Eckhold said consideration should be given to lifting the target to 2.5%.

Eckhold noted that the Reserve Bank of Australia was targeting an inflation range of 2%-3%.

In a report he said the new target “might better match NZ’s historical capacity to deliver price stability and bring expectations closer to reality”.

“Raising the mid-point of the inflation target would need to be matched with increased focus on the MPC to ensure the future average inflation rate doesn’t drift higher with the target midpoint,” he said.

Arthur Grimes, a former Reserve Bank chair and chief economist who is credited as one of the main architects of the inflation targeting model, told TVNZ’s Q+A with Jack Tame lifting the target to 2.5% was a “ludicrous point of view”.

Grimes said it was “rubbish” to say that hitting a 2% mid-point was difficult for the Bank to achieve.

“In the last five years the Reserve Bank has obviously inflated a lot under the previous governor, but before that inflation averaged 1.6% for over a decade.

“The idea [the target] needs to be raised is ludicrous,” he said.

New Zealand pioneered the inflation targeting model for central banks - a technique of controlling inflation that was later copied by banks around the world.

Willis said lifting the target would be to “tolerate a higher level of price increases for New Zealanders - that’s a higher cost of living”.

“We’re a Government that was elected on getting inflation under control,” she said.

Edmonds acknowledged there would be “different parts of the argument that different commentators will bring up”.

“I think the discussion is going to happen and I’m going to be listening intently to where people think we should fall,” Edmonds said.

Edmonds said she had not given thought to whether Labour would campaign on changing the target.