Reserve Bank Graeme Wheeler is not fixated on the low headline inflation rate but may cut interest rates further if a global economic downturn threatens New Zealand, he says.
Mr Wheeler told a business group in Christchurch the bank's policy targets agreement (PTA) with the government gave him plenty of flexibility when setting the Offical Cash Rate.
Reserve Bank Governor Graeme Wheeler Photo: RNZ / Diego Opatowski
"A mechanistic approach can lead to an inappropriate fixation on headline inflation," he said.
Sliding oil prices had been a key factor in pushing the annual consumer inflation down to a 16-year low of 0.1 percent in 2015, which had prompted some commentators to call for lower interest rates.
But Mr Wheeler said the bank could look through temporary shocks such as the slump in oil, and a knee-jerk policy reaction could do damage.
"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."
Core inflation, which discounts temporary factors, is sitting at about 1.6 percent, close to the middle of the bank's target band, and inflation expectations were also close to the RBNZ's expectations, he said.
The Reserve Bank last week held its official cash rate steady at 2.5 percent but warned that it could cut rates again if needed.
The weak inflation outlook, volatile financial markets and uncertain global economy has led to several analysts forecasting a rate cut to as low as 2 percent by the end of the year.
"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," Mr Wheeler said.
Annette Beacher, chief Asia-Pacific strategist at TD Securities in Singapore, said the speech showed the governor was "in no mood to cut (rates)".
The New Zealand dollar rose after the speech as financial markets reduced the chances of a rate cut next month.
