graeme wheeler : some thoughts on the inflation outlook and monetary policy speech by mr graeme wheeler, governor of the reserve bank of new zealand, to exportnz, tauranga, 29 july 2015. * * * introduction i would like to discuss new zealand ’ s recent inflation outcomes, the main factors accounting for them, and the outlook for monetary policy in ensuring that future average inflation over the medium term is near the 2 percent midpoint of the target band. since the former issues have been covered extensively in our recent monetary policy statements, speeches and analytical papers, the main focus will be on our current policy thinking. 1 new zealand is far from alone in experiencing low inflation. across the 30 or so economies ( mainly advanced economies ) whose central banks pursue inflation targeting, headline and underlying inflation have commonly been below specified goals. there are several reasons for this : the level of excess capacity in product and factor markets in several economies remains high ; wage outcomes have been subdued, even in countries with low unemployment ; measures of inflation expectations have declined ; and many commodity prices are appreciably lower than a year ago. in most advanced economies, policy interest rates are at historic lows. in four advanced economies, they are negative 2. recent inflation performance over the past two years annual cpi inflation in new zealand has been in the lower half of the 1 to 3 percent target band, except for the period since the december quarter 2014, when the fall in oil prices brought cpi inflation to very low levels. low headline inflation during this period has been primarily due to negative inflation in the tradables sector ( figure 1 ), which accounts for around half of the cpi regime. figure 1 : contribution to headline cpi inflation ( annual, deviation from 1992q1 to 2015q2 average ) source : statistics new zealand, rbnz estimates see, for example, mcdermott ( 2015 ), ‘ the dragon slain? near - zero inflation in new zealand ’, speech on 23 april 2015, and richardson ( 2015 ), ‘ can global economic conditions explain low new zealand inflation? ’, analytical note 2015 / 3. this treats the euro area as one economy. if each economy were treated individually, 22 economies would have negative policy rates. bis central bankers ’ speeches annual cpi inflation is currently 1. 7 percentage points below the mid - point of the target range and 2. 1 percentage points below its long - term average. of the latter, 1. 6 percentage points are accounted for by below - average tradables inflation

- debt components of capital flows that will address emerging concerns are : first, a view needs to be taken on the quantity and quality of fii flows. while quotas or ceilings, as practised by certain countries, may not be desirable at this stage, there is merit in our keeping such an option open and exercising it selectively as needed, after due notice to the fiis. second, there is scope for enhancing quality of flows through a review of policies relating to eligibility for registration as fiis, and assessment of risks involved in flows through hedge funds, participatory notes, sub - accounts, etc. strict adherence to ‘ know your investor ’ principle, especially in regard to flows from tax - havens, including beneficial ownership would enhance quality. third, price - based measures such as taxes could be examined though their effectiveness is arguable and hence may not be desirable. fourth, fdi flows, as currently defined, also include transfer of equity from residents to non - residents and a disaggregated analysis of fdi through several routes could enable a policy - intervention, as appropriate on quantities and quality. fifth, since there are several routes by which non - residents could hold shares and voting power over indian corporates, reporting and monitoring arrangements could be considered for assessing the aggregate shares of residents ( other than government ) and non - residents in larger corporates and those in sensitive sectors in particular. such monitoring could help timely policy - responses on several fronts. finally, consistent with the principle of hierarchy of capital flows, a view could be taken on relative policy emphasis on sources and types of investment that need to be encouraged. for example, it is well recognized that giving better incentives to foreign investors over domestic investors results in scope for “ round - tripping ” and inefficiencies. similarly, if avenues for portfolio flows or equity - transfers from domestic to foreign investors are easily available and attractive, the flows under fdi defined in terms of adding to domestic production - capacities will tend to be smaller. attention to these may simultaneously address micro or institutional issues relating to corporates, volatility issues relating to capital flows and financial markets, and above all ensure high - quality inflows of foreign savings which is more important to our country at this stage of development, to provide a healthy supplement to the domestic savings. ultimately our unswerving objective has to remain a sustained growth rate, moderate inflation and distributive justice, in an atmosphere of overall stability