16 December 1999

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.

For further information contact:

Paul Jackman	Patricia Herbert
Corporate Affairs Manager	Press Secretary
The Reserve Bank	The Treasurer
Phone 04 471 3671, home 04 938 8177	Phone 04 4719 412, home 384 2952

The full text of the new PTA is attached.

POLICY TARGETS AGREEMENT

This agreement between the Treasurer and the Governor of the Reserve Bank of New Zealand (the Bank) is made under sections 9(1) and 9(4) of the Reserve Bank of New Zealand Act 1989 (the Act), and shall apply for the balance of the Governor's present term, expiring on 31 August 2003. It replaces that signed on 15 December 1997.

In terms of section 9 of the Act, the Treasurer and the Governor agree as follows:

1. Price stability

Consistent with section 8 of the Act and with the provisions of this agreement, the Bank shall formulate and implement monetary policy with the intention of maintaining a stable general level of prices, so that monetary policy can make its maximum contribution to sustainable economic growth, employment and development opportunities within the New Zealand economy.

2. Policy target

a) In pursuing the objective of a stable general level of prices, the Bank shall monitor prices as measured by a range of price indices. The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand.

b) For the purpose of this agreement, the policy target shall be 12-monthly increases in the CPI of between 0 and 3 per cent.1

3. Unusual events

a) There is a range of events that can have a significant temporary impact on inflation as measured by the CPI, and mask the underlying trend in prices which is the proper focus of monetary policy. These events may even lead to inflation outcomes outside the target range. Such disturbances include, for example, shifts in the aggregate price level as a result of exceptional movements in the prices of commodities traded in world markets, changes in indirect taxes, significant government policy changes that directly affect prices, or a natural disaster affecting a major part of the economy.

b) When disturbances of the kind described in clause 3(a) arise, the Bank shall react in a manner which prevents general inflationary pressures emerging.

4. Implementation and accountability

a) The Bank shall constantly and diligently strive to meet the policy target established by this agreement.

b) It is acknowledged that, on occasions, there will be inflation outcomes outside the target range. On those occasions, or when such occasions are projected, the Bank shall explain in Policy Statements made under section 15 of the Act why such outcomes have occurred, or are projected to occur, and what measures it has taken, or proposes to take, to ensure that inflation comes back within that range.

c) 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.

d) The Bank shall be fully accountable for its judgments and actions in implementing monetary policy.

.........................................................		.........................................................

Hon Michael Cullen		Donald T Brash
Treasurer		Governor
		Reserve Bank of New Zealand

DATED at Wellington, this 16th day of December 1999

1 Statistics New Zealand introduced a revised CPI regime from the September quarter, 1999. Until the June quarter 2000, 12-monthly increases in the CPI will be calculated by comparing the new CPI series with the old CPI series adjusted by removing the impact of changes in interest rates and section prices. This adjustment is calculated by Statistics New Zealand. (Refer to the RBNZ's November 1999 Monetary Policy Statement, p 8, for details.)