Reserve Bank disputes 3 percent notion

By NZPA

Friday 14th June 2002

The Reserve Bank says it strongly disputes the notion that it would only allow the economy to grow at 3 percent annually.

In a letter released today but written on May 27, acting governor Rod Carr told Parliament's finance and expenditure committee the bank had to be certain that any growth rate did not persistently add to inflation or deflation.

He said that whether any sustained rate of growth added to inflation or deflation depended on geography in its broadest sense, rather than monetary policy.

But the bank said its current estimate was that a 3 percent growth rate would not put pressure on inflation either way.

"The estimate does not constitute a limit beyond which the economy cannot grow. In fact, the economy is probably growing faster than that at the moment."

He disputed that the bank's current estimate of a 3 percent limit was a self-fulfilling prophecy.

"To be sure, if growth continues to exceed our estimate of what can be sustained inflation, we would tighten monetary policy, which in turn would slow the economy.

"But if we were wrong about our estimate, inflation would fall too far, too fast."

He said unexpectedly low inflation would be independent evidence that the economy could grow faster than the bank assumed. The converse was also true.

If inflation moved lower, then the bank would have to move to facilitate more activity, he said.

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