I think you’ve hit the nail on the head. At the MPS they sounded like they were solely after a slump in headline inflation which they felt would then lead to a reversal of some of the nasty inflation expectations numbers we’ve seen.

Personally, I’m not so sure if a fall in fuel prices is enough to change the inherent inflation premium households will ask for, and firms are willing to pay for, during the wage bargaining. I would ask the question “is the recession that the RBNZ is forecasting enough to drive down these implicit inflation expectations” – given their forecasts, I just don’t see it.

Of course, it is possible that the outlook for domestic economic activity is actually worse then they are forecasting …

“This doesn’t sound like an optimal way to conduct monetary policy: pray/ask firms to not pass on cost increases.”

Indeed – my “attempt” to defend the statement above was the best I could do, and it really didn’t convince me 🙂

What i suspect is happening is that the Bank is running scared on inflation . Relative price movements become important precisely when a blip in some relative prices (eg oil or food) cause a temporary blip in the inflation rate, and then this blip is passed on and incorporated into wages, which then get passed on in turn as further price changes. The Bank’s disinflation in the early 1990s and 1999 relied precisely on this principle; temporary price cuts in the recession led to lower headline inflation rates, and then lower wage rounds etc. Given the very high headline rate, the bank must be hoping for the headline rate to come down fast in the next six months in order to lead to low wage increases. They have a very short opportunity for this mechanism to work because costs have been increasing and will increase (because of the depreciation of the dollar) and will eventually be passed on; so unless the headline figure is very low very soon, they might find that the recession hasn’t killed inflation. Hence the encouragement of high profile sectors to hang off on increasing prices.

This doesn’t sound like an optimal way to conduct monetary policy: pray/ask firms to not pass on cost increases.

Disclaimer: I wrote the referred to Bulletin article.

Indeed, I suspect that the Bank is giving people that feeling – how can inflation expectations fall below 3% if the Bank isn’t interested in getting medium term inflation down in the first place 😛

If just further fuels my suspicion that Bollard sees his role as to keep interest rates as low as possible within the constraint of the inflation target – meaning that 3% average inflation is not the maximum but the minimum, as there’s no incentive or pressure to aim for anything lower.

Spot on – energy policy is not a government strong point 🙂

The best thing the government can do is reduce the uncertainty surrounding the investment – rather then prattling on with popularist jargon.

This is why I don’t understnad successive energy ministers promising to build more AND cheaper power. Why would you overbuild firstly, and secondly why would you collapse prices? They set silly expectations then rant when they are not delivered and undermine confidence in markets overall as a result. Personally I blame Max Bradford 🙂

Be more efficient – that should see “shadow” prices for whatever the hell the SOE produces fall.

I don’t know about the government sector – it is definitely a strange one

I would say that they didn’t fully apply their method for controlling inflation when it was required – in 2003. If they had we wouldn’t be worrying about it now.

They’ve realised this now, but the global financial crisis is preventing them from doing anything to try and make up for it – in that sense the speech could be construed as desperate.

However, I don’t even think the speech was necessary – it just hurts the Bank’s credibility, as it makes it look like they depend on firms to control inflation, rather than being the strong body that can anchor expectations which they should appear to be