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Monetary Policy

The focus of monetary policy is to maintain price stability. A Policy Targets Agreement between the Governor of the RBNZ and the Minister of Finance sets out the specific targets for maintaining price stability, while seeking to avoid unnecessary instability in output, interest rates and the exchange rate. The current Policy Targets Agreement, which was signed in September 2012 on the appointment of a new Governor, requires the Bank to maintain inflation in the range of 1% to 3% on average over the medium term, but with the additional requirement to “focus on keeping future average inflation near the 2% target midpoint”.

Following the lowering of the OCR from 8.25% in mid 2008 to 2.5% in April 2009 in response to the international credit crisis, RBNZ began increasing the OCR again as the economy began to recover. The OCR was increased to 3.0% in July 2010, before a cut of 50 basis points back to 2.5% as an “insurance cut” following the February 2011 Canterbury earthquake. Since then, a deteriorating global outlook has meant that interest rates have remained at 2.5%, with increases not expected until the first half of 2014 as the Canterbury rebuild gathers momentum and domestic demand pressures increase, generating inflationary pressures.

Macro-Prudential Policy

The RBNZ is also responsible for promoting the maintenance of a sound and efficient financial system. In May 2013, a Memorandum of Understanding was signed between the Minister of Finance and the Governor of the RBNZ defining macro-prudential policy and its operating guidelines. The objective of the Memorandum is to increase the resilience of the domestic financial system and counter instability arising from credit, asset price or liquidity shocks. Macro-prudential instruments include adjustments to the core funding ratio, countercyclical capital buffers, adjustments to sectoral capital requirements and quantitative restrictions on the share of high loan-to-value ratio (LVR) loans in the residential property sector. The latter was implemented on the 1 October 2013 with a requirement for commercial banks to restrict new residential mortgage lending at LVRs of 80% or higher to no more than 10% of the dollar value of new residential mortgage lending.

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