NZ Inflation – Is this a big deal?
2012 July 16 by Graham Parlane
All
I find today’s release utterly fascinating and I am somewhat surprised that there isn’t more chatter about the possible implications of this very low reading.
The RBNZ have one main mandate in a contract with the government. And that is to keep inflation, on average, over time, between 1-3%. For the vast part of my career that has been trying to control rampant inflation by raising rates. However now we are at the bottom end of the spectrum which is why I am so interested.
You see, if inflation settles below an annualised 1.0% for more than say a couple of quarters (that the room the ‘on average, over time’ part gives) then the RBNZ, through their contract with government, MUST employ actions to create inflation!
The market is sitting here with muted reaction, happily assuming that this quarter or the next (Q3) will be the bottom of the inflation cycle and that the Canterbury rebuild will squeeze the spare capacity in the economy thus promoting inflation (back into the range).
Certainly the mantra of ‘lower for longer’ as far as the cash rate goes is a lock but could we see something far more dovish evolve this year?
G.
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