Reserve Bank governor Adrian Orr said the market needs to be "more comfortable" with expansionary monetary policy if businesses keep looking backward when setting prices, but acknowledged the bank could get caught behind the curve.
On Thursday the central bank held rates at a record low 1.75 percent and said it expected to keep the official cash rate at an expansionary level for a considerable period of time as inflation remains well below the mid-point of its 1 percent to 3 percent target range.
Business behaviour is a key factor, he told BusinessDesk in an interview.
"Rather than being forward looking, people are setting prices and wages based on the inflation measures of the last 12 months, rather than what they think it is going to be over the next 12 months or next two years," he said.
Orr, who took the helm at the central bank after steering New Zealand Superannuation Fund for a decade, said "I am a business person myself" and "you generally want to do business on what you think is going to happen in the future rather than what you are currently observing."
Among other things, "you need to invest ahead of the ahead of the curve, you need to train more people, you think to think about what wages you are going to have to pay to attract and retain and motivate the capability they need," he said.
Until that happens Orr said "we can be more comfortable about having an expansionary monetary policy, which is why we are saying we are prepared to sit here for a long time and it’s unclear if it’s going to go one way or the other," he said. On Thursday the central bank said the direction of its next move is "equally balanced, up or down. Only time and events will tell."
Orr said, however, if people suddenly "leap forward in inflation expectations and wage pressures start to rise much quicker than we projected" the bank could get caught out and "that's why we have a watching brief on all of the above," he said.
He also acknowledged that "it's not a long-term game we can play" as pressures will eventually emerge, noting that wage inflation is starting to pick up in the United States although it remains very muted in New Zealand.
He underscored the bank is "absolutely committed" to two percent inflation and wouldn't fall in to the trap of saying it is aiming to for 3 percent just to get to 2 percent and its "best estimate" is that what is it doing now will get it there.
Key to its success is more open and transparent communication, Orr said.
"One thing you can expect is change because doing the same thing over and over again and expecting a different outcome is the definition of insanity," he said, adding that writing "deep and meaningful bulletin articles and providing a lot of behind closed door speeches is not hitting the mark."
He said the central bank and journalists have "lost mutual trust" and he will seek to repair that. He also underscored that the bank needs to be clear about what it thinks and why decisions are made, particularly in the banking regulation and insurance regulatory space. Otherwise, "what comes out is a confused concoction of criticism." While the criticism is wrong, according to Orr, "the communication gap is real. I want to close that."
In terms of the actual strategy, he said it would be a "whole combination of things." He pointed to a raft of interviews he has done since assuming the role and said the emphasis was on "simple, straightforward language" that made the bank's message "comprehensible and dare I say from time to time interesting for people on the street."
He said the bank would focus on using far more access points with a "much more important" digital strategy.
He wouldn't be drawn on whether there would be any changes in the bank's communication team other than to say "the behavior within the communications team is changing rapidly."