RB policy targets tweaked, not overhauled

Last updated 16:00 20/09/2012

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New policy settings for the Reserve Bank will include monitoring asset prices and a more refined inflation target, but there will be little fundamental change.

"I believe that the existing policy targets agreement has served New Zealand well and there are benefits in maintaining consistency in the agreement," Finance Minister Bill English said in a statement.

"Therefore, I did not feel that any major changes were required."

The latest policy targets agreement was signed by English and incoming Reserve Bank Governor Graeme Wheeler today. The agreement sets out how the central bank will aim to maintain price stability, and will ultimately dictate future interest rate changes.

The new agreement maintains the target of keeping inflation at 1-3 per cent, but now includes a new requirement that the bank focuses on keeping future inflation at around 2 per cent.

According to a statement it includes a stronger focus on financial stability, by including asset prices in the range of indicators the Reserve Bank monitors.

"The Global Financial Crisis has focused some attention on monetary policy frameworks, and I want to ensure the PTA continues to reflect best international practice," English said.

The Government was also working with the Reserve Bank and Treasury to assess whether  further macro-prudential tools - such as imposing more strict loan to value requirements - would help prevent asset bubbles.

"That work will continue," English said.

Wheeler, who takes over as governor on September 26, said the new focus on a 2 per cent midpoint for inflation "will help better anchor inflation expectations".

"In addition, the PTA's stronger focus on financial stability makes it clearer that it may be appropriate to use monetary policy to lean against the build-up of financial imbalances, if the Reserve Bank believes this could prevent a sharper economic cycle in the future."

The macro-prudential policy tools being developed should be separate from, but complementary to monetary policy, Wheeler said.

"The primary purpose of such tools will remain to promote stability of the financial system."

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- BusinessDay.co.nz

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