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New Zealand Economic and Financial Overview 2016

Monetary Policy


The Reserve Bank of New Zealand Act 1989 stipulates that the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices. The Act requires that there be a Policy Targets Agreement (PTA) between the Minister of Finance and the Governor of the Reserve Bank of New Zealand. The most recent PTA was signed in September 2012 at the time of the appointment of a new Governor. For the purposes of the PTA, the policy target remains to keep future CPI inflation outcomes 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".

Section 3 of the PTA notes that there is a range of events that will cause the actual rate of CPI inflation to vary about the medium-term trend. When such events occur, the Bank is tasked with responding in a manner consistent with meeting its medium-term target.

The PTA requires the Bank, in pursuing the price stability target, to seek to avoid unnecessary instability in output, interest rates and the exchange rate and to implement policy in a sustainable, consistent and transparent manner. A 2012 amendment incorporates in the PTA the existing statutory requirement to implement monetary policy in a way that "has regard to the efficiency and soundness of the financial system", recognising the importance of financial system issues during the GFC.

The Reserve Bank Act provides the Bank with autonomy to carry out monetary policy in pursuit of the price stability objective. However, the Act contains certain provisions that enable the Government to override the price stability objective and the PTA for a limited period, provided this is done in accordance with a set of procedures that would make the override publicly transparent. These provisions have never been used.

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