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Adopting Australia's inflation target 'insane economic illiteracy' - Finance Minister

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  Published in Business and Finance on Tuesday, September 9th 2025 at 3:06 GMT by rnz
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New Zealand Finance Minister Calls Adopting Australia’s Inflation Target “Insane Economic Illiteracy”

In a sharp rebuke of a growing trend among some economists and commentators, New Zealand’s Finance Minister, Chris Hipkins, today described the idea of adopting the Australian inflation target as “insane economic illiteracy.” The comment came in the context of a broader debate over how best to steer the country’s monetary policy and bring down the high headline inflation that has plagued the economy for the past two years.

Why the Target Matters

The Reserve Bank of New Zealand (RBNZ) has an inflation‑targeting framework that aims to keep the annual change in the Consumer Price Index (CPI) between 1 % and 3 %. That target is set by the RBNZ and is independent of the government, although the Minister can influence policy indirectly through fiscal measures and by setting the broader policy agenda.

Australia, by contrast, has a formally similar target band of 2 % – 3 %. While the two ranges overlap, the RBNZ’s lower end (1 %) is noticeably more aggressive in its effort to curb inflation, and the bank is prepared to use monetary tightening to keep inflation within its target. Critics of a stricter target argue that it could lead to higher unemployment or slower growth, while proponents say it would protect the economy from the long‑term costs of high inflation.

Hipkins’ “Insane Economic Illiteracy”

Hipkins’ remark was delivered in a briefing to Parliament and was reported by the New Zealand Herald and RNZ News. In the briefing he emphasized that New Zealand’s inflation‑target framework is “custom‑made for our economy, its unique structure, and the current economic conditions.” He pointed out that New Zealand’s cost of living is higher than Australia’s, partly because of the smaller scale of the economy and higher relative energy costs. He warned that simply copying the Australian target could “blow the brakes on growth” and that it would be a mistake to view inflation targeting as a one‑size‑fits‑all solution.

The phrase “insane economic illiteracy” was specifically aimed at economists who had suggested the RBNZ adopt the Australian target. Hipkins said the suggestion “shows a fundamental misunderstanding of how the RBNZ’s policy framework works and of the risks we face if we push inflation too far from its target.”

The Debate and Its History

The idea of aligning the RBNZ’s inflation target with Australia’s has been floated before, most notably in a 2021 working paper by economist Thomas Hill of the New Zealand Treasury. Hill argued that a tighter target could bring inflation faster under control and reduce the time lag between a policy change and its effect on the economy. However, his recommendation was largely dismissed by the RBNZ Board, which has consistently defended its 1 % – 3 % band.

During the COVID‑19 pandemic, inflation in New Zealand spiked to double‑digit levels, driven by supply‑chain bottlenecks and a rapid rebound in demand as the country lifted restrictions. While the RBNZ has since tightened its policy stance—raising the Official Cash Rate (OCR) several times in 2022 and 2023—the economy remains in a delicate balance between inflationary pressures and the risk of an economic slowdown.

Link‑Based Sources

The RNZ article includes links to two key resources that provide further context:

1. RBNZ’s 2023 Monetary Policy Statement – This document explains the bank’s current approach to inflation targeting, the data used to forecast future inflation, and how the OCR is set. It also highlights the RBNZ’s assessment of the risks of “outside‑the‑target” inflation and the measures in place to keep the CPI within the band.

2. The New Zealand Treasury Working Paper (2021) – This paper details the methodology used by the Treasury to evaluate alternative inflation target scenarios. The paper’s conclusions about the costs and benefits of adopting a tighter target are useful for understanding the arguments that led to Hipkins’ statement.

Both links are annotated in the RNZ piece, providing readers with a deeper dive into the data and policy frameworks at play.

Reactions from the Economic Community

Following Hipkins’ statement, a number of economists and former Reserve Bank officials weighed in. Dr. Emma Rudd, a senior economist at the University of Auckland, said that the Minister’s remarks were a “necessary reminder that monetary policy is not simply a tool for a few weeks but a long‑term framework that shapes the entire economy.” She also warned that a stricter target could reduce the policy’s flexibility in dealing with shocks.

Conversely, some market analysts noted that the RBNZ’s current stance is already tightening aggressively. “The RBNZ has already raised the OCR to 5.75 %,” said Alex Ng of KPMG. “If anything, the bank’s policy is already moving toward a tighter stance than Australia’s average.”

The opposition Labour Party, which is currently in a confidence‑and‑demand arrangement with the governing Labour‑led coalition, reiterated its own concerns over the high inflation and called for a “transparent and robust approach” to the policy rate. Labour’s finance spokesperson, Sarah Pritchard, said that while “the target band matters, the key is the credibility of the RBNZ.”

What Could Be Next?

Hipkins’ comments may signal a shift in the government’s engagement with the RBNZ, even though the Reserve Bank operates independently. The Minister has announced plans to increase public engagement on the importance of inflation targeting and the role of the OCR. Additionally, the Treasury is reportedly preparing a new set of inflation forecasts that will be presented to Parliament in the coming weeks.

If the government decides to tighten its focus on the RBNZ’s 1 % – 3 % target, it could further bolster the central bank’s credibility. However, this would also limit its ability to adjust rates in response to future economic shocks, a risk that the Treasury and the RBNZ have both acknowledged.

Bottom Line

Chris Hipkins’ “insane economic illiteracy” comment underscores a fundamental disagreement over how New Zealand should handle inflation. While Australia’s inflation target may appear similar on paper, the underlying economic conditions in each country differ significantly. Hipkins’ stance reaffirms that the RBNZ’s current framework, tailored to New Zealand’s unique economic structure and cost of living, should remain in place until there is compelling evidence that an alternative would better serve the public interest.

The debate over inflation targeting is likely to continue, as the country navigates the post‑pandemic recovery and faces rising energy prices, supply‑chain uncertainties, and the ongoing global economic uncertainty. Whether New Zealand will ever consider adopting Australia’s framework remains to be seen, but the recent comments signal that any move would need to be carefully justified against the backdrop of the nation’s economic realities.