23 August 2002
Be Careful, Minister!
"Michael Cullen must be extremely careful what signals he sends to both financial markets and the public when he
negotiates the new Policy Targets Agreement with the Governor-designate of the Reserve Bank," says National's Finance
spokesman Don Brash.
"During the campaign, Dr Cullen created the impression that there would be no change to the inflation target after the
election. Now he is implying that while there will be no change to the top of the target, he intends to raise the floor
of the target.
"At the same time, he is trying to suggest that he does not want higher average inflation. I would certainly hope not,
since there is no evidence that higher inflation would enable New Zealand to grow faster on a sustainable basis.
"Dr Cullen must avoid even the perception of being more tolerant of inflation because of the adverse impact this would
have on long term interest rates."
Dr Brash says that during the past decade, inflation has averaged about 2 per cent and over the last three years 2.5 per
cent, a rate of inflation very similar to that in Australia over the same period (after the effects of their GST are
"It is certainly hard to see any reason why the Finance Minister should be asking the Reserve Bank to be even more
relaxed about inflation.
"Dr Cullen has suggested he wants the Bank to operate monetary policy in a more flexible way. But by doing this, he is
ignoring the conclusions of his own expert reviewer Professor Lars Svensson. Last year, Svensson concluded that: 'the
Reserve Bank's current conduct of monetary policy is entirely consistent with the best international practice of
flexible inflation targeting, with a medium-term inflation target that avoids unnecessary variability in output,
interest rates, and the exchange rate.'
"After the Svensson Review, Dr Cullen, sensibly, sought a multi-party consensus on its conclusions. Now that the
election is over, he should stop playing political games with the monetary policy framework and again seek a multi-party
consensus on that framework.
"As Svensson also recommended, there is considerable merit in avoiding a situation where something as fundamental as New
Zealand's attitude to inflation is subject to change after each election. I, for one, would be a willing party to a
sensible political consensus on the inflation target, which has some prospect of enduring," Dr Brash concluded.