20 September 2012

New Policy Targets Agreement signed today

Finance Minister Bill English and incoming Reserve Bank Governor Graeme Wheeler today signed a new Policy Targets Agreement, which sets out specific targets for maintaining price stability.

The new Policy Targets Agreement takes effect on 26 September, when Mr Wheeler starts his five-year term as Governor.

The agreement continues to require the Reserve Bank to keep CPI inflation between 1 per cent and 3 per cent on average over the medium term.

Within this target, the new agreement now requires the Bank to focus on keeping future average inflation near 2 per cent.

The PTA also includes a stronger focus on financial stability, by including asset prices in the range of indicators the Bank monitors, and requiring the Bank to have regard to the soundness and efficiency of the financial system in setting monetary policy.

“I believe that the existing policy targets agreement has served New Zealand well and there are benefits in maintaining consistency in the agreement,” Mr English says. “Therefore, I did not feel that any major changes were required.

“However, the Global Financial Crisis has focused some attention on monetary policy frameworks, and I want to ensure the PTA continues to reflect best international practice.

“Consequently, some additional wording has been agreed with the new Governor to reflect lessons from New Zealand’s last economic cycle and the Global Financial Crisis.

“As we’ve said before, the Government is also working with the Reserve Bank and Treasury to assess whether further macro-prudential tools could help moderate credit cycles, by building additional resilience when it is likely to be needed. That work will continue.”

Mr Wheeler says the new PTA remains focused on maintaining price stability, as well as avoiding unnecessary instability in economic output, interest rates and the exchange rate.

“The focus on the 2 per cent midpoint will help better anchor inflation expectations,” he says.

“In addition, the PTA’s stronger focus on financial stability makes it clearer that it may be appropriate to use monetary policy to lean against the build-up of financial imbalances, if the Reserve Bank believes this could prevent a sharper economic cycle in the future.”

Mr Wheeler also emphasised that the macro-prudential policy tools currently being developed by the Bank should be separate from, but complementary to monetary policy. “The primary purpose of such tools will remain to promote stability of the financial system.”

Mr Wheeler will send a letter to the Finance Minister setting out how he plans to manage his relationship with the Minister, recognising the Bank’s operational independence.

“It will ensure the Government and the Reserve Bank keep each other fully informed about fiscal and monetary policy issues,” he says.

Weblink to new Policy Targets Agreement:
http://www.rbnz.govt.nz/monpol/pta/

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