FXStreet (Bali) - The Reserve Bank of New Zealand, as noted by Chief Mr. Wheeler today, will continue to draw on the flexibility contained in the PTA (Policy Targets Agreement) in managing economic risks and assessing monetary policy. Official statement Speaking to the Canterbury Employers Chamber of Commerce in Christchurch, Mr Wheeler said that the Bank would avoid taking a mechanistic approach to interpreting the PTA. Some commentators see a low headline inflation number and immediately advocate interest rate cuts, he said. “A mechanistic approach can lead to an inappropriate fixation on headline inflation. It would cut across the flexibility deliberately built into the PTA framework, and risk creating serious distortions in the financial system, housing market, and broader economy.” Mr Wheeler said that a flexible approach is necessary in view of the numerous factors the Bank is required to consider in the PTA – such as asset prices, financial stability and efficiency, volatility in output, interest rates, and the exchange rate. “All of these factors have bands of uncertainty attached to them. There are also uncertainties as to which transmission channels monetary policy will operate through and the lags involved in achieving desired outcomes.” He said that the current annual headline inflation rate of 0.1 percent is primarily because of the negative inflation in the tradables sector, and the decline in oil prices in particular. “Low oil prices are recognised in the PTA as a factor that can legitimately cause inflation to be outside the target band. It would be inappropriate to attempt to offset the low oil price effect through the OCR, which tends to influence inflation outcomes over an 18 month to 2 year horizon.” Mr Wheeler said that the Bank’s goal is to anchor inflation expectations close to the mid-point of the price stability target range, while retaining discretion to respond to inflation and output shocks in a flexible manner. “Looking ahead, monetary policy will continue to be accommodative. With the ongoing weakness in commodity prices, and particularly oil, it will take longer for headline inflation to reach the target range. On the other hand, annual core CPI inflation, at 1.6 percent, is well within the target range, and the Bank’s combined measures of annual inflation expectations, averaging 2 percent, are more encouraging in terms of consistency with the PTA. However, we would not wish to see inflation expectations become unstable and decline significantly.” Mr Wheeler said that most of the risks facing the economy, however, are on the downside, particularly the rising concern about the strength of the global economy and increased financial market volatility. “This reflects several factors, including the importance of growth in China and other emerging markets, tensions in oil and other commodity markets, and the prospect of increasing divergence between monetary policies in the major economies. “In addition to the powerful structural forces of globalisation, technology, and demography that are reducing global inflation, our economy has been hit by several important supply-side shocks. These include falling oil and dairy prices, strong net migration flows and rising labour force participation. Some, such as the changes in oil prices, net migration and participation are positive for growth, but all of the supply shocks are exerting downward pressure on inflation. “If concerns deepen around the prospects for the global economy and its impact on New Zealand, some further policy easing may be needed over the coming year to ensure future average inflation settles near the middle of the target range. “These issues and the requirements in the PTA in respect of asset prices, financial stability and efficiency and volatility in output, interest rates and the exchange rate, mean that there is much to consider in determining monetary policy that extends well beyond the current level of headline inflation.” For more information, read our latest forex news.