Speaking to the Institute of Directors in Auckland, Spencer said inflation in New Zealand and world-wide had been low since the 2008 GFC, which is part was due to globalisation, the growth of China, the rise of the digital economy and low inflation expectations.
Spencer said these global trends appear to be changing the nature of the price formation process in New Zealand.
Globalisation over the past 10 years has led to outsourcing of labour intensive production to cheaper locations, which has lowered the price consumers pay for a wide range of goods and also placed downward pressure on wages for lower-skilled jobs in advanced economies.
The scale of China’s growth and economy has had a profound effect – China has become the largest exporting nation, and its expansion of capacity has restrained the prices of industrial materials and a wide range of manufactured goods.
“These factors may be reducing the leverage monetary policy has over inflation, although their persistence and impact on inflation in New Zealand remain uncertain,” Spencer said.
“The changes in domestic pricing behaviour are causing our flexible inflation targeting approach to become more flexible. In pursuing our long-term price stability objective, relatively more weight is being attached to output, employment and financial stability.
“However, this can only be sustained if monetary policy’s long-term price stability credentials are maintained” Spencer added.
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Reserve Bank Governor Grant Spencer indicated in a speech yesterday persistently low inflation has prompted the bank to think about whether it needs to tweak its approach to monetary policy.