KEY POINTS:
Reserve Bank governor Alan Bollard has appealed for all economic players to make decisions with the best interests of the country's growth and stability in mind.
Speaking to the Canterbury Employers' Chamber of Commerce today, Dr Bollard said economic policy had to be alert to emerging shocks to the economy, and how they might affect price stability and growth.
All economic players, including firms, households and governments made decisions that could influence how a shock affected the economy, he said.
"Those decisions need to be made with the best interests of growth and stability in mind."
New Zealand had responded positively to significant global shocks in the past few years, and there was no sign of those shocks abating, Dr Bollard said.
"We have enjoyed a decade of growth, the longest period of economic growth since the post-World War 2 era. Inflation has been low, averaging 2.2 per cent since 1998.
"However, neither the current global expansion nor price stability - known internationally as the Great Moderation - can be taken for granted," he said.
In recent years inflation had averaged in the top half of the Reserve Bank's 1-3 per cent target range, due to higher demand fuelled by the economic expansion, and because of supply-side cost shocks.
International price shocks that had posed key policy challenges included surging oil prices, a wider commodity price boom, a global housing market boom and its after-effects, a consumption boom in advanced economies, and efforts to offset climate change.
"Inflation pressures in New Zealand have been significantly boosted by the shock to personal consumption from the housing boom and the rundown in household savings," Dr Bollard said.
"Soaring global dairy prices have added to these pressures by boosting farm incomes.
"Higher prices for oil and other imported raw materials have also contributed through higher production costs."
Soon New Zealand would be hit with yet another price shock as a result of the Government's emissions trading scheme.
Many of those challenges and associated price pressures were associated with the growing international presence of China and other emerging market economies, he said.
Financial market instability emanating from the sub-prime US mortgage market represented the most recent emerging threat to economic growth.
Monetary policy had to be constantly tuned to handle large changes in economic conditions, so the inflationary effects arising from shocks could be managed.
"Our inflation targeting framework is robust and well-placed to deal with these challenges," Dr Bollard said.
"We have been able to absorb recent shocks reasonably well because of the improvements in our economic institutions and policymaking frameworks, avoiding the boom-bust cycles of the 1970s."
- NZPA
