'Monetary policy on the right track' - PM

Cabinet briefed on possible changes to new Reserve Bank Governor Wheeler's Policy Targets Agreement, PM Key says

17th Sep 12, 5:18pm by Alex Tarrant

Cabinet has been briefed on what possible changes might be made to the Reserve Bank's contract with the Minister of Finance, Prime Minister John Key says.

But asked whether there might be any new emphasis on areas other than price stability, Key said any changes would be "very minor."

Incoming Reserve Bank Governor Graeme Wheeler is set to replace Alan Bollard as head of the central bank on September 26. The change-over means Wheeler will sign a new Policy Targets Agreement - effectively the Bank's mandate - with Finance Minister Bill English.

The current PTA emphasises the Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices. Its current policy target is to "keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium-term."

Opposition political parties have suggested the Reserve Bank also consider a certain level of employment, economic growth or level of the exchange rate along with its mandate for CPI inflation outcomes.

Critics of the Opposition say these requirements could in some cases conflict with one another, not allow for such stringent price control as wanted, or be asking the Reserve Bank to try and control areas of the economy that might be better dealt with through fiscal policy.

Speaking to media at his post-Cabinet press conference in Wellington on Monday, Key said Cabinet was briefed earlier during the day on the discussions between Wheeler and English regarding the new PTA.

"I'll leave that for the Minister of Finance to talk more about that, but what I can say is that, any changes are very modest," Key said.

"We have effectively done a review [of monetary policy], and we're comfortable we're on the right track," he said.

"The general advice, and the general agreement between the incoming Governor and the Minister of Finance is that the settings are about right."

Asked whether the next PTA might include any emphasis in areas other than just price stability, Key replied:

"There're some very minor changes - I hasten to add they're minor - and you'll need to take those up with the Minister of Finance when he announces [the next PTA]."

"I wouldn't read too much into it. It's pretty minor," Key said.

Asked about an expectation that macro prudential levers might be used by the Bank earlier rather than later, Key said:

"I think generally speaking that's been a view that Alan Bollard had as well - that in terms of stability of the financial markets, greater control over financial institutions, and the capacity to look at their lending ratios, for instance, was critically important.

"That's why the previous Governor actually changed, and instituted, various rules and a different level of compliance. So I think that's already there to be honest."

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6 Comments

by Stephen L | 17th Sep 12, 6:46pm 1347864397

Heads in the sand; in the 1990s sand of one target, one tool. The world has moved on, we are in the middle of the biggest global economic event since the 1930s, where the ROTW are desperately eating whoever's lunch they can find; and we continue to offer ours up for a pittance of short term consumer boibles, at the cost of any long term breadth to our productive economy.

by Basel Brush III | 18th Sep 12, 9:18am 1347916709

Absolutely!

by midgetkiwi | 18th Sep 12, 1:54pm 1347933265

"So I think that's already there to be honest."

Look! An honest politician, vote for him!

by iconoclast | 18th Sep 12, 2:07pm 1347934051

Quote - Under the TPA, the RBNZ is required to conduct monetary policy with a policy target of "keeping future CPI inflation between 1 per cent and 3 per cent".

Define CPI. Which CPI? Does that mean REAL FAIR-DINKUM inflation, or does it mean inflation as measured by the CPI which is manufactured by Statistics NZ

by iconoclast | 18th Sep 12, 2:21pm 1347934905

If Wheeler accepts that TPA then all his expertise and experience will be sidelined. He will be employed to use his skills to simply follow someone elses dictat. He should tell English to take his job and shove it.

by wtf | 18th Sep 12, 2:44pm 1347936250

A large part of the problem is the myth of globalisation. Its been couched as free trade but that's just the minor part. The real game is the freedom to move money freely from country to country, asset class to asset class, to pump and dump at will. Has New Zealand become more able to export in the last 30 years or more insecure? In the mean time all impediments to foreign capital have been removed. And successive National and Labour governments just say "there's nothing we can do, its the markets". Key exemplifies this.

Jane Kelsey has been talking about this for years as well as exposing the MAI and TPP, one of the few academics with enough guts to consistently criticise government policies.

"The mythology of globalisation is enormously powerful. It allows governments to abdicate responsibility for the consequences of their own policies, laws and practices; it justifies a refusal to consider alternative policies that might cause less harm to people, communities, and their environment.”