History of Policy Targets Agreement in New Zealand

With Dr Alan Bollard coming to the end of his second 5 year term as Reserve Bank Governor, there will be a little uncertainty as to the monetary policy outlook under Graeme Wheeler the governor-designate until a new policy targets agreement is finalised in the next few months. Grant Cleland from the Parliamentary Library produced a neat summary of the policy targets agreement since the signing of the Reserve Bank Act in 1989.

Under section 9 of the Reserve Bank Act 1989, before the appointment or reappointment of a Reserve Bank Governor, an agreement setting out specific policy targets has to be signed between the Treasurer and the Reserve Bank Governor. There have been nine Policy Target Agreements signed to date. The first PTA was signed in March 1990 between the Minister of Finance, Hon David Caygill and the Reserve Bank Governor, Dr Don Brash. It set the policy target of achieving an annual inflation rate of 0 – 2 percent by the year ended December 1992.

The following table shows the policy targets agreements signed to date, the signatories, and the inflation policy target within each of them. In December 1996, the policy target for annual inflation changed to a 0 – 3 percent inflation target band. In September 2002, this inflation target band was amended to an inflation target band of 1 – 3 percent on average over the medium term.

The latest Policy Target Agreement was signed in December 2008. It was similar to the previous PTA signed in May 2007, but included a change to the Government’s economic objectives as part of the Price stability section of the agreement. The wording for this section from the last two PTAs are shown below:

May 2007 Policy Targets Agreement – “The objective of the Government’s economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives”.

December 2008 Policy Targets Agreement – “The Government’s economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders. Price stability plays an important part in supporting this objective”.

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