MNI: RBNZ Gov: To Eye Easing if Non-Trade Infl Doesn't Pick Up

     SYDNEY (MNI) - The Reserve Bank of New Zealand has been patient in its

monetary policy approach to bring inflation back to its 2% target but may have

to consider further policy easing if non-tradable inflation doesn't start to

pick up in late 2018, as currently forecast.

     Acting Governor Grant Spencer made the comments in his first public speech

since talking over the role on September 27.

     In the speech, Spencer talked about the factors that are causing weak

inflation in New Zealand and world-wide, saying the New Zealand Phillips curve

may have flattened but the degree and persistence of the flattening are very

uncertain.

     "We have insufficient evidence to say that the flattening of the Phillips

curve is permanent rather than temporary. And we have not yet observed how wages

and prices respond to a very tight capacity situation," Spencer said.

     Spencer noted that in its November Monetary Policy Statement the RBNZ

forecast that non-tradable inflation would pick up from late 2018 in response to

increasing capacity pressures.

     "If this response does not eventuate then we would have to consider a

further easing of policy to generate additional domestic demand pressure,

particularly if global inflation remains low in line with our forecasts," he

said.

     But any move would be taken after careful consideration to avoid generating

unwarranted instability in output, the exchange rate or household debt, he said.

     The RBNZ has been patient in bringing consumer price index inflation back

to the 2% target and needs to continue to remain patient, he said, adding, "it

is fair to say that our flexible inflation targeting approach is becoming more

flexible."

     Spencer said the RBNZ has been placing more weight to low global inflation

and its flat future official cash rate track is based on the assumption of a

greater persistence of low global inflation.

     But this also creates some upside risk for inflation and interest rates if

the assumption proves incorrect and global inflation does pick up in response to

increased global growth.

     "This would put upward pressure on domestic interest rates," Spencer said,

adding that this scenario was discussed in the November policy statement.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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