Steady As She Goes for RBNZ targets

Incoming Reserve Bank governor Graeme Wheeler met with Finance Minister Bill English today. Photo / Supplied

The Reserve Bank's target of keeping inflation between 1 and 3 per cent remains unchanged in a new Policy Targets Agreement signed today by incoming Governor Graeme Wheeler and Finance Minister Bill English.

Under the agreement the Reserve Bank must keep inflation as measured by the Consumers Price Index (CPI) within that band "on average over the medium term".

But the new agreement is slightly more prescriptive then the previous one, as it now requires the Bank to focus on keeping future average inflation near 2 per cent.

Mr English said the new agreement included a stronger focus on financial stability, by including asset prices in the range of indicators the bank monitors, and requiring the bank to keep in mind the soundness and efficiency of the financial system when setting monetary policy.

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

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

But Mr English said the global financial crisis focused some attention on monetary policy frameworks, and he wanted to ensure the PTA continues to reflect best practice.

Consequently, some additional wording has been agreed with the new Governor to reflect lessons from New Zealand's last economic cycle and the global financial crisis.

Mr Wheeler said the new PTA remained focused on maintaining price stability, as well as avoiding unnecessary instability in economic output, interest rates and the exchange rate.

"The focus on the 2 per cent mid-point will help better anchor inflation expectations," he said.

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 agreement takes effect on September 26 when Mr Wheeler begins his five year term.