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Monetary Policy

The focus of monetary policy is to maintain price stability. A Policy Targets Agreement (PTA) 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 PTA requires the RBNZ to maintain inflation in the range of 1% to 3% on average over the medium term, but with an additional requirement to "focus on keeping future average inflation near the 2% target midpoint".

The OCR was lowered from 8.25% in mid-2008 to 2.5% in April 2009 in response to the GFC but, as the economy began to recover, the RBNZ started to raise rates again. The OCR was increased to 3.0% in July 2010, before a 50 basis points reduction to 2.5% was made following the February 2011 Canterbury earthquake. A deteriorating global outlook meant that interest rates remained at 2.5% until March 2014 when the Bank began to tighten monetary policy. The OCR was increased by a cumulative 100 basis points to reach 3.5% in July 2014, as rising momentum in the Canterbury rebuild and domestic demand pressures were expected to lead to increasing inflationary pressures. However, the RBNZ has since lowered the OCR to 2.5% reflecting the low domestic and global inflation environment, with further rate cuts dependant on emerging data.

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.

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