New Reserve Bank Policy Targets Agreement

The new Policy Targets Agreement is attached, plus the text of the letter referred to. The letter will be signed when Dr Bollard formally takes up his appointment on 23 September. See also... Joint Press Release - RBNZ & Finance Minister

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POLICY TARGETS AGREEMENT

This agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand (the Bank) is made under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act). The Minister and the Governor agree as follows:

1. Price stability

a) Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices

b) The objective of the Government's economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives.

2. Policy target

a) In pursuing the objective of a stable general level of prices, the Bank shall monitor prices as measured by a range of price indices. The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand.

b) For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term.

3. Inflation variations around target

a) For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which is the focus of the policy target. Amongst these reasons, there is a range of events whose impact would normally be temporary. Such events include, for example, shifts in the aggregate price level as a result of exceptional movements in the prices of commodities traded in world markets, changes in indirect taxes, significant government policy changes that directly affect prices, or a natural disaster affecting a major part of the economy.

b) When disturbances of the kind described in clause 3(a) arise, the Bank will respond consistent with meeting its medium-term target.

4. Communication, implementation and accountability

a) On occasions when the annual rate of inflation is outside the medium-term target range, or when such occasions are projected, the Bank shall explain in Policy Statements made under section 15 of the Act why such outcomes have occurred, or are projected to occur, and what measures it has taken, or proposes to take, to ensure that inflation outcomes remain consistent with the medium-term target.

b) In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner and shall seek to avoid unnecessary instability in output, interest rates and the exchange rate.

c) The Bank shall be fully accountable for its judgements and actions in implementing monetary policy.

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Hon Dr Michael Cullen
Dr Alan E Bollard

Minister of Finance
Governor Designate

Reserve Bank of New Zealand

Dated at Wellington this 17th day of September 2002

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DATE

Hon Dr Michael Cullen
Treasurer
Parliament Buildings
Private Bag
WELLINGTON

Dear Michael

On assuming the responsibility as Governor of the Reserve Bank I thought it would be useful to outline how I envisage various important relationships evolving.

To contribute to the effective conduct of overall economic policy it would be useful to build on the existing relationship between the Reserve Bank and The Treasury in sharing information. In addition I would like to establish a regular dialogue with you on economic developments and ensure that I remain fully briefed on the development of Government policies which potentially impact on the formulation and implementation of monetary policy consistent with the Policy Targets Agreement. It is also important to ensure that there is a shared understanding of the way in which the Policy Targets Agreement impacts on the formation and implementation of monetary policy.

It is both my obligation and intention to consult with a wide range of sources in the public and private sectors in forming my opinion as to the appropriate monetary conditions consistent with maintaining stability in the general level of prices.

The Reserve Bank also has a broader range of operational and policy functions. To the extent you have a responsibility in these areas, the Bank will provide timely briefings and reports on matters of importance to you.

I believe that we should agree that we should inform each other of the release of material into the public domain that may be likely to cause public comment on matters of mutual interest. We should take care to ensure such material is not inconsistent with maintaining the independence and credibility of the Bank.

Yours sincerely

Dr Alan E Bollard
Governor

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