RBNZ: Reflections on 25 years of inflation targeting

The Reserve Bank of New Zealand (RBNZ) Governor Wheeler delivered a speech on inflation targeting done by the central bank for the past 25 years. The insights of the speech are:

1) Inflation targeting has delivered price stability without reducing long term growth rate.
2) Low and stable inflation expectations increase monetary policy`s effectiveness.
3) The long term path of real exchange rate is unaffected by the monetary and exchange rate regimes.
4) There are limits to what monetary policy can do: supportive structural and fiscal policies are also needed.
5) Monetary policy`s independence requires a high level of accountability and transparency.
6) Monetary policy needs to be supported by sound prudential policies.
7) The emergence of marco-prudential policies.

In his concluding comments, Governor Wheeler mentioned that there has been strong growth in new sector of activity including the information technology sector. He also remarked that the economy has remained resilient in the recent shocks from the GFC and Christchurch earthquakes.

The full speech can be found here.


Figure 1: Inflation and GDP growth

Figure 2: New Zealand`s real effective exchange rate

This is where traders should take caution as the RBNZ has mentioned several times that the exchange rate has been too high and making exports uncompetitive.

FXStreet has a recap on this speech as well.