Reserve Bank trying to understand unexpectedly weak inflation

Reserve Bank assistant governor and chief economist John McDermott. Photo / Mark Mitchell

The Reserve Bank is trying to understand why inflation has consistently undershot expectations over the past six years, which it sees as a strategic priority this year, assistant governor John McDermott says.

In a speech explaining how the central bank arrives at policy decisions, McDermott told the Manawatu Chamber of Commerce that the RBNZ's forecasting team hadn't predicted the "persistent weakness in inflation or the persistent strength in the New Zealand dollar".

The bank's team isn't alone in being baffled by protracted low inflation, and the RBNZ has been shifting resources to boost its understanding.

"The persistent period of weaker than expected inflation remains a focus for the bank, and the bank's research programme is shedding light on the drivers of low inflation," McDermott said. "Increasing our understanding of low inflation is a strategic priority for the bank."

The RBNZ is projecting the consumers price index will have risen 0.6 per cent in the June quarter when the figures are released next week for an annual pace of 0.6 per cent.

The bank's mandated measure of inflation has tracked below the target 1 per cent-to-3 per cent band since September 2014 as a strong kiwi dollar and cheap oil prices keep imported inflation low, while record migration removes pressure on wage increases.

The bank refrained from cutting interest rates last month, waiting instead for the June economic and inflation figures.

Governor Graeme Wheeler has been balancing the weak level of inflation against the risk posed to the country's financial stability by rising house prices.

McDermott today outlined how the bank makes its policy decisions, without providing any guidance for next month's review, saying the greater role of committees "mean the bank now relies less on the single decision maker model" and " allows the consideration of a greater range of viewpoints".

Governor Wheeler will only have the final say if there isn't a majority or consensus view on policy options, he said.