The Finance Minister and the incoming Governor of the Reserve Bank today signed a new Policy Targets Agreement (PTA), which sets out specific targets for achieving and maintaining price stability.

The most significant change is that the Reserve Bank is required to take a forward looking, medium-term approach to achieving price stability. This gives the Bank more flexibility to decide how it responds to shocks in the economy and inflation variations around the target.

The new PTA raises the bottom of the inflation target to 1 per cent, while retaining the 3 per cent upper limit and includes a statement of the Government's broader economic goals.

Dr Cullen said: "The Government's aim has always been to avoid unnecessary instability in output, interest rates and the exchange rate. That objective was explicitly included in the PTA I signed in 1999 with the previous governor. I believe the changes inserted in this PTA will make it easier for the bank to achieve this goal.

"The agreement is broadly as the markets have been anticipating and is consistent with the publicly stated advice of expert commentators. I expect it to be well-received by the financial markets and by other stakeholders in the economy."

Dr Bollard said: "This PTA acknowledges the way monetary policy has and will evolve. As inflation expectations have become steadily better anchored, so monetary policy has become more flexible, and this trend will continue, as signalled in this PTA.

"Price stability is the Reserve Bank's `primary function', but we also seek to avoid `unnecessary instability in output, interest rates and the exchange rate.' The shift to an inflation target `on average over the medium term' allows us to better achieve this. This helps economic growth, which, we all agree, New Zealand needs, by enhancing predictability and confidence and, by that, savings and productive investment. The raising of the bottom of the band brings the overall target more in line with New Zealand's inflation outcomes in recent years and those in other countries.

"In addition, today I am releasing the text of a letter that I intend to send to the Minister once I have begun my duties as Governor. This lays out how I wish to manage my relationship with the Minister, recognising the particular need for the Bank to be operationally independent and yet also for the Bank and the Government to keep each other informed," Dr Bollard concluded.

Dr Cullen added that the new PTA sits well alongside the framework for the improved accountability mechanisms recommended by the Svensson Review and legislated for in the Reserve Bank Amendment Bill currently before Parliament. The bill strengthens the Reserve Bank Board's role within the Bank and enhances the Bank's independence.

The bill retains the Governor as a member of the Board but removes him as chairman in favour of a non-executive chair, and requires that the Board issue its own annual report assessing the performance of the Governor.

For further information contact:
Paul JackmanCorporate Affairs ManagerThe Reserve Bank of New Zealand Phone 04 471 3671 or 021 497 418 Patricia HerbertPress SecretaryMinister of Finance Phone 04 4719 412 or 021-270-9013
The new Policy Targets Agreement is attached, plus the text of the letter referred to. The letter will be signed when Dr Bollard formally takes up his appointment on 23 September.

Please use the link to access the new PTA - http://www.rbnz.govt.nz/news/2002/0124629.html

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