RBNZ targets 2% inflation for economic stability

Governor advocates for a flexible approach to inflation targeting

RBNZ targets 2% inflation for economic stability

In a speech at the 2024 Economics Forum at The University of Waikato, Reserve Bank of New Zealand governor Adrian Orr highlighted the central bank’s challenge in managing inflation, which has remained persistently high following the COVID-19 pandemic.

Orr (pictured above) outlined the importance of realigning core inflation to the 1% to 3% target range, with a specific focus on returning to the 2% midpoint as a crucial measure for stabilising the economy.

RBNZ’s flexible inflation targeting strategy

Orr advocated for a flexible approach to inflation targeting, highlighting the need for a medium-term perspective. This strategy allows the monetary policy committee the latitude to balance various factors in response to economic shocks, affirming the 2% midpoint target as optimal for New Zealand’s economic conditions.

“Two per cent continues to strike the right balance between the costs and benefits of inflation,” he said. “A focus on 2% appears to be consistent with an ‘optimal’ level of inflation. In the long-term, an inflation target centred on 2% is more likely to mean continued growth and steady jobs, supporting the prosperity and wellbeing of everyone.”

Orr on balancing economic priorities

While focusing on inflation, Orr also underscored RBNZ’s broader mandate, which includes monetary policy, financial stability, cash operations, and the oversight of financial markets infrastructure.

He pointed to the enhancement of monetary and fiscal policy coordination, the implementation of the Deposit Takers Act with its Depositor Compensation Scheme, and the introduction of debt-to-income (DTI) restrictions as key areas of focus. These measures are aimed at bolstering financial stability and supporting New Zealand's long-term economic prosperity.

RBNZ is set to release its February Monetary Policy Statement on Feb. 28.

Download Orr’s speech here.

Here’s where to read the RBNZ media release.

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