RBNZ: A stepping stone – ANZ

According to analysts at ANZ, yesterday’s announced changes to the RBNZ’s Policy Targets Agreement tweaked the monetary policy objective, adding it will “contribute to supporting maximum sustainable employment within the economy”, but the “policy target” is still defined solely in terms of inflation.

Key Quotes

“This is similar to the RBA set-up but falls well short of a Fed-style true ‘dual mandate’. However, the existing Reserve Bank Act was a firm constraint on changes to the PTA wording: it requires that price stability be the sole target. Once the Act is updated, the PTA will be as well, closer to a true dual mandate. On the face of it, two targets with one tool doesn’t work.”

“If a negative supply shock hits (eg an oil shock) that crunches employment but also lifts inflation above target, how is the RBNZ to respond? But in practice, this tension is nothing new – it’s exactly why PTAs up until now have stressed (first prescriptively, then more generally) that inflation and growth may sometimes go in opposite directions, and in that case the RBNZ should allow inflation to temporarily deviate from target in order to avoid unnecessary stability in output, subject to keeping inflation expectations anchored. It all amounts to the same thing: flexible inflation targeting. We would be pretty relaxed about further tweaks in this direction. Pragmatism will rule.”