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OCR change unlikely in response to oil based inflation drop

Author
Felix Marwick,
Publish Date
Wed, 3 Feb 2016, 2:33PM
(Graeme Wheeler, Getty Images)
(Graeme Wheeler, Getty Images)

OCR change unlikely in response to oil based inflation drop

Author
Felix Marwick,
Publish Date
Wed, 3 Feb 2016, 2:33PM

The Reserve Bank is signalling it won’t use the Official Cash Rate as a response to lower oil prices driving down inflation.

The Bank’s approach has been under scrutiny with current rates of headline inflation significantly below the two to three percent target range.

In a speech delivered in Christchurch today Reserve Bank Governor Graeme Wheeler said the Bank will avoid taking a mechanistic approach in interpreting the agreement.

He has highlighted the impact low oil prices are having on inflation being outside the target band.

But Mr Wheeler said it would be inappropriate to offset them through the OCR, as it tends to influence inflation outcomes over an 18 month to two year horizon.

He also warned against an inappropriate fixation on headline inflation telling a business audience in Christchurch that the Bank will take an accommodative approach on monetary policy.

He said a mechanistic approach could lead to an inappropriate fixation on headline inflation and would cut across flexibility built into the Policy Targets framework.

That, Mr Wheeler said, could create serious distortions in the financial system, housing market, and the broader economy.

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