Monetary policy "a little more flexible"

Reserve Bank Governor Alan Bollard says the Reserve Bank has a mandate for monetary policy to be "a little more flexible".

That's from a speech today to the Rotary Club of Wellington.

Dr Bollard told the gathering that he intended to deliver a similar inflation rate to the one seen over the last decade. However, Dr Bollard said "The world that we face now has moved on from the world of 1989, when the Reserve Bank Act was passed into law. Maintaining price stability, as I am required to do, is different from firstly having to achieve it, as was required then.

"Before becoming Governor, I signed a new Policy Targets Agreement with the Minister of Finance. This new agreement offers monetary policy a bit more scope to take evolving circumstances into account. In particular, the new agreement makes clearer that the Reserve Bank should maintain price stability in a flexible way that does not unnecessarily disrupt the real economy."

Dr Bollard said the key change in the PTA was that the inflation target had been explicitly defined in terms of "future inflation … on average over the medium term". He said this implied that monetary policy should be forward-looking, and avoid getting distracted by transitory fluctuations in the inflation rate.

Dr Bollard added that this increased flexibility needed to be applied in a disciplined way and with care. He said "The language of the new agreement makes clear that inflation should not be persistently outside either end of the band. This is because a sustained breach of the target could affect people's perceptions of the trend inflation rate. That in itself could create a major inflationary problem.

"Monetary policy still needs to respond particularly assertively when inflation is expected to be well outside the target range, or persistently outside it. But, at other times, if inflation is fairly stable and if we do not see pressures that have the potential to get out of control, then we have a mandate to be a little more flexible in our response," Dr Bollard concluded.

The full text of the speech is available on the Reserve Bank of New Zealand website:

http://www.rbnz.govt.nz/speeches/0127615.html

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