Breaking the shackles of inflation targets

WHEN it comes to containing prices and inflicting the least damage on the global economy, pragmatism is better than purity. Worries about encouraging risky behaviour did not prevent a rescue of depositors at Silicon Valley Bank (SVB) or the roll-out of a further US backstop to the banking system. The same is true of a totem of monetary policy the past few decades: inflation targeting.

Being above your target – for many central banks it is somewhere around 2 per cent – is not an argument to keep going with interest rate hikes, regardless of the cost to either growth or financial health.

Even in New Zealand, the country credited with pioneering the use of numerical objectives, flexibility has been key. While the relentlessly hawkish tone of the Reserve Bank of New Zealand (RBNZ) may obscure it, the target has evolved and was only ever intended as means to an end. It has been diluted and widened over the years.