11 October 2016
Understanding low inflation in New Zealand
September quarter inflation, due for release next Tuesday, is expected to be low, Assistant Governor John McDermott said in a speech to the Bay of Plenty Employers and Manufacturers Association
in Rotorua today.
Dr McDermott said that inflation is expected to rebound in the December quarter and be at the bottom of the target
range. It is important to understand why inflation has been lower than expected by the Bank and other forecasters, in
order to set monetary policy going forward.
“There are several reasons for low inflation – both here and abroad. In New Zealand, tradables inflation, which accounts
for almost half of the CPI regimen, has been negative for the past four years. Much of the weakness in inflation can be
attributed to global developments that have been reflected in the high New Zealand dollar and low inflation in our
import prices. Strong net immigration and increased labour market participation have also boosted the supply potential
of the economy, meaning that New Zealand has been able to grow at a robust pace without generating significant
There also appear to have been changes in how inflation is generated in New Zealand: the drivers and composition of net
immigration influence the degree of associated inflationary pressure for any given migration flow, and inflation
expectations appear to now place more weight on past inflation outcomes than they did prior to the global financial
“The Bank will continue to closely monitor developments in the drivers of inflation and investigate any persistent
changes in how inflation is generated.
“The Bank’s goal remains to keep future annual CPI inflation outcomes between 1 percent and 3 percent on average over
the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint.
“As described in the September OCR review, monetary policy will continue to be accommodative. Interest rates are at
multi-decade lows, and our current projections and assumptions indicate that further policy easing will be required to
ensure that future inflation settles near the middle of the target range.”