WELLINGTON, Feb 3 (Reuters) - New Zealand's central bank will continue to draw on the flexible nature of its policy targets agreement when determining monetary policy, Governor Graeme Wheeler said Wednesday.
In a prepared speech to the Canterbury Employers' Chamber of Commerce he said the bank would avoid a "mechanistic approach" as that can lead to an "inappropriate fixation on headline inflation."
Under the policy targets agreement, New Zealand's central bank is mandated with keeping inflation between 1 percent and 3 percent, with a focus on the midpoint.
While annual headline inflation is currently at 0.1 percent, leading some commentators to advocate immediate interest rate cuts, Wheeler said there are many factors to take into consideration.
He underscored that inflation is currently low because of negative inflation in the tradables sector and the decline in oil prices in particular.
Wheeler said that oil prices are a factor that can legitimately cause inflation to be outside the target band, and therefore the bank can look through them when assessing monetary policy.
"It would be inappropriate to attempt to offset the low oil price effect through the OCR," he said.
He also said, however, monetary policy will continue to be accommodative and recognized that most of the risks facing New Zealand's economy are on the downside.
"If concerns deepen around the prospects for the global economy and its impact on New Zealand, some further policy easing may be needed over the coming year," he said.
The RBNZ kept the official cash rate on hold at a meeting last month but reopened the door to rate cuts, just a month after all but slamming it shut.
