Central banks globally are prepared to over-shoot inflation targets as they battle rapidly falling prices and a dislocation in labour markets, New Zealand's Central Bank Governor said on Thursday.
Treasury yields have risen recently on concerns that government spending globally to support economies could push inflation above central bank targets more quickly than expected.
However, Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr said the world is no longer focused on the fear of returning to the problems of high inflation that led central banks to under achieve on their inflation targets for so long.
"The single biggest challenge in the world at the moment is rapidly falling prices, deflation and dislocation in the labour markets," Orr said at the New Zealand Economic Forum in the University of Waikato.
"Every central bank is talking about risking over-shooting inflation targets so at least on average they are broadly right, because at the moment they are all well undershot," he added.
Orr said there was nervousness in the market about whether U.S. President Joe Biden's $1.9 trillion coronavirus relief stimulus package announced was "about 12 months behind the game".
He said RBNZ was is in a "sound position" to continue to meet its mandate amid the economic shocks from COVID-19, adding that stimulatory monetary conditions were still needed to meet its targets.
The RBNZ kept rates unchanged last week, and said the settings would be maintained for a prolonged period.
The government last week tasked the RBNZ to help calm a red-hot property market.
"We will be looking at how far the prices are from some sense of fair value, what that may mean to financial vulnerability and what our instruments can actually do to at least nudge those prices towards a sense of fair value," Orr said.
(Reporting by Praveen Menon and Renju Jose; Editing by Richard Pullin)
