16 December 1999

Joint Press Statemen by Treasurer Michael Cullen and Reserve Bank Governor Don Brash

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New Policy Targets Agreement

The Treasurer and the Governor of the Reserve Bank today signed a new Policy Targets Agreement (PTA), this being the statutory contract between the Treasurer and the Governor which sets out specific targets for achieving and maintaining price stability.

The one significant change compared to the previous PTA is that, with the new words in bold, section 4(c) of the PTA now states: "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."

Dr Cullen commented: "The amendment meets the Government’s requirements. It in no way compromises either the 0 to 3 percent inflation target or the focus on the maintenance of price stability.

"The renegotiation sought by the Government reflected a concern not to repeat the experience of the mid-1990s, when the export sector was placed under immense pressure by a sharp increase in the value of the dollar.

"Since then, the Reserve Bank has introduced a number of changes to the conduct of monetary policy, the effect of which should be to inject more stability into the system. I welcome those changes and consider this latest change another step in the same direction," Dr Cullen said.

Dr Brash said: "I did not seek this change to the PTA, but I nevertheless welcome it, as it makes explicit the way monetary policy in New Zealand has been evolving in recent years. Inflationary expectations have become lower and better anchored, and provided this continues to be the case aggressive shifts in interest rates, and consequently the exchange rate, should become less necessary. As the credibility of the monetary framework in New Zealand continues to be further enhanced, so ‘instability in output, interest rates and the exchange rate’ should further decline. The Reserve Bank will encourage this trend, while recognising that, as in other countries, there will still be cycles in output, interest rates and the exchange rate.

"The Reserve Bank remains totally focussed on its obligation, set by statute and the PTA, to maintain ‘a stable general level of prices.’ This has not changed. Also, offshore or climatic events, or sharp shifts in fiscal policy, can still exaggerate the business cycle. However, a trend towards less variability is apparent and, barring extreme events, this should continue," Dr Brash concluded.

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