(Bloomberg) -- New Zealand’s central bank said it’s determined to head off unnecessarily low inflation or even deflation, signaling an intent to continue to loosen monetary policy if required.
“Consistently below target inflation has its own unique challenges that are best avoided,” Reserve bank Governor Adrian Orr said in a speech Wednesday in Wellington. While low interest rates could lead to undue risk-taking, at this stage in the Covid-19 challenge “we strongly believe that the best contribution we can make to our monetary and financial stability mandates is ensuring we head off unnecessarily low inflation or deflation, and high and persistent unemployment,” he said.
Orr reiterated that the RBNZ, which is has cut its official cash rate to 0.25% and is using quantitative easing to reduce bond yields, is actively preparing a package of additional monetary policy tools to use if needed. The central bank has indicated it could take the OCR into negative territory early next year.
“The policy tools that we’ve used to date and the additional tools that we are considering using as a package in the near future are not new to central banking,” he said. “The instruments include various forms of negative wholesale interest rates, further quantitative easing using large scale purchases of domestic and foreign assets, direct lending to banks, and forward guidance as to what needs to be done under certain conditions.”
The RBNZ knows that these tools are technical and unfamiliar to most New Zealanders and that it has an ongoing communications challenge to ensure people remain confident in its intentions and actions, he said.
“Our next near-term challenge is to outline our future monetary policy strategies and tools, and when we might use them,” Orr said. “We are well prepared for this challenge.”
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