The unusual nature of the recession and the unsteadiness of the recovery make assessing the inflation path harder than in normal times. Shifts in consumption baskets caused by supply-side restrictions are creating significant noise in the inflation data.12 And the stop-start nature of the recovery means the short-term path of inflation is surrounded by considerable uncertainty.
With New Zealand’s current account deficit sitting around 9 percent of GDP, it is our view that the exchange rate cannot be sustained at current levels over the medium term. Does trying to lower the New Zealand dollar run counter to monetary policy and the Reserve Bank’s low inflation objective? We do not believe so.