Geoff Simmons and Bernard Hickey review how interest rate targeting works and the options to change the current settings

Geoff Simmons and Bernard Hickey review how interest rate targeting works and the options to change the current settings

By Geoff Simmons*

New Zealand started the practice of targeting the interest rate as a way to tame inflation and provide an economy with a sound basis to grow.

But with growth in many countries stuck below pre-GFC levels, policy makers are questioning whether this is still the right approach.

Bernard Hickey reviews the history and how well that worked.

He also assesses how this now-standard approach is working now for both New Zealand, and the other major economies that are using it.

And he lists the alternatives and adjustments that could be adopted to respond to the new current realities of a low or no inflation environment.


Geoff Simmons is an economist working at the Morgan Foundation. This article is here with permission and first appeared here.

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It’s interesting to me so many people have lost faith in governments ability to deliver employment, productivity and wage growth and as we do so central banks are increasingly being talked about as needing to be delegated a broad range of powers to do what governments will not. Perhaps, rather than listening to what governments policies are on the economy, we should ask what their preferred reserve bank appointees views would be.

It’s also interesting to me that commercial banks have got so locked into lending involving leveraged real-estate assets (homes, rentals, farms, commercial property etc.) yet other types of more diversified finance like cash flow lending or asset based loans outside that niche have remained tepid.

Always worth talking about this subject. There are of course other targets that governments combined with central banks could target.
Highish employment is one, a balanced current account is another. Meanwhile there are combined tools that could work very well, especially when an economy is not operating at maximum. Notably direct funding of infrastructure spending would potentially work to both deliver infrastructure and help inflation along, without messing with short term tax rates, or borrowing offshore, each of which have other negative consequences.
Each of these types of solutions got some airing at Jackson Hole, and so it will be interesting to see post the US election whether some come to fruition.