NZ among the few nations yet to hit limits of monetary policy, Wheeler says

The Reserve Bank of New Zealand still has room to move on monetary policy unlike many central banks that have already pulled their policy levers to the limits of their effective range, governor Graeme Wheeler says.

At Parliament's finance and expenditure select committee, Wheeler said quantitative easing by central banks across the globe has reached US$150 billion a month and there are now US$12 trillion of government securities trading on negative yields because central banks had been forced to ramp up their stimulus programmes.

"The worry is central banks have accommodated so much it's taken a lot of pressure off governments to do structural policy reform," Wheeler said. "What I would think is important in a lot of those countries is there be appropriate fiscal positions adopted and more aggressive structural reform because I think the central banks are running out of ammunition in those countries."

New Zealand interest rates are still a stand-out in a world of extraordinarily low borrowing yields. The 10-year government bond is yielding 2.38 percent compared to 1.51 percent for the benchmark US 10-year Treasury bond, a negative yield of -0.1 percent on Japanese 10-year government bonds and -0.12 percent on 10-year German bunds.

When asked by Labour Party finance spokesman Grant Robertson whether New Zealand was among those nations that had reached the limit of monetary policy, Wheeler said no.

"I think it's approaching its limited effectiveness in countries that have negative interest rates and have high quantitative easing and you've now got negative interest rates in countries that represent a quarter of world output," Wheeler told politicians. "We still have power with our monetary policy, but we can mainly affect inflation through the non-tradables sector."

Wheeler disagreed that the policy targets agreement - which tasks him with targeting the 2 percent midpoint of a 1-to-3 percent band for headline inflation - needed changing because it allows the bank enough flexibility to allow for issues outside its control.

"One could argue where the targets should be, but I don't think there's a good case for moving away from inflation targeting," Wheeler said.

The Reserve Bank cut its official cash rate 25 basis points to 2 percent today, a record low, and indicated more reductions are likely as a persistently high New Zealand dollar makes it difficult for Wheeler to stir inflation back up within the bank's target range.

Higher yields have stoked demand for the kiwi dollar, which was tracking 6 percent above the Reserve Bank's projections on a trade-weighted basis when it signalled a rate cut was imminent last month and has been a key factor in New Zealand's tradable sector facing negative inflation for the past four years. The bank lifted the forecast track of the TWI in today's monetary policy statement to reflect the persistent strength of the kiwi currency.

(BusinessDesk)

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