New governor signs revised policy target agreement in New Zealand

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The Reserve Bank of New Zealand revealed on September 20 that finance minister Bill English and incoming central bank governor Graeme Wheeler had signed a new policy targets agreement, which sets out specific targets for maintaining price stability in the country.

The new agreement will take effect on September 26, the day Wheeler begins his five-year term as chief of the central bank.

Following the signing the central bank will continue to be required to keep CPI inflation between 1% and 3% on average over the "medium term". Within this target, the agreement asks the Bank to focus on keeping future average inflation near 2%.

The document includes a "stronger focus" on financial stability, according to a statement released by the central bank. This is achieved by including asset prices in the range of indicators the central bank must monitor, and by requiring the Bank to have regard for the "soundness and efficiency of the financial system in setting monetary policy".

Explaining the decision to keep the targets in line with the previous mandate, English said: "I believe the existing policy targets agreement has served New Zealand well and there are benefits in maintaining consistency in the agreement."

The finance minister added, however, that the global financial crisis had focused attention on monetary policy frameworks, which meant some changes to the wording of the policy targets agreement. "I want to ensure the [agreement] continues to reflect best international practice," English said.

"The [agreement'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," Wheeler said.

Both officials commented on the discussions under way between the government and the central bank to assess whether further macro-prudential tools could help moderate credit cycles. Wheeler emphasised that these policy tools should be separate from, but complementary to monetary policy. "The primary purpose of such tools will remain to promote stability of the financial system, he said."

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