What is the Policy Targets Agreement?

The Reserve Bank of New Zealand Act 1989 specifies that the primary function of the Reserve Bank shall be to deliver "stability in the general level of prices." Section 9 of the Act then says that the Minister of Finance and the Governor of the Reserve Bank shall together have a separate agreement setting out specific targets for achieving and maintaining price stability. This is known as the Policy Targets Agreement (PTA).

A new PTA must be negotiated every time a Governor is appointed or re-appointed, but it does not have to be renegotiated when a new Minister of Finance is appointed. The Act requires that the PTA sets out specific price stability targets and that the agreement, or any changes to it, must be made public. The PTA can only be changed by agreement between the Governor and the Minister of Finance (section 9(4)).

Note, however, that under the Reserve Bank Act the Government has the power (section 12) to override the PTA. It can do this by directing the Reserve Bank to use monetary policy for a different economic objective altogether for a 12 month period, though again it must make the instruction public. A new PTA must then be negotiated to cover the override period and another PTA must be negotiated when the override ends. In either case, if a new PTA cannot be negotiated, the Governor can be dismissed. So far, this override section has not been used.

There have been nine PTAs so far since the passage of the 1989 Act. Graeme Wheeler and Finance Minister Bill English signed the current PTA on 20 September 2012.

The PTA has four sections. The first confirms that "the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices." It also summarises the Government's overall economic objectives.

The second section says that in pursuing the objective of a stable general level of prices, the Bank shall monitor prices, including asset prices, as measured by a range of price indices. The Bank's inflation target shall be 1 to 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint. The price stability target is defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand.

Section 3 says that when external events push inflation above or below its medium-term trend, "the Bank will respond consistent with meeting its medium-term target."

The final section describes how the Reserve Bank shall implement and be accountable for its decisions. This includes providing explanations for any inflation breaches, or projected breaches, in the Bank's quarterly Monetary Policy Statements. The last section also says that, as it implements monetary policy to achieve price stability, the Bank "shall seek to avoid unnecessary instability in output, interest rates and the exchange rate."

The PTA is a public document, and as such is an important part of monetary policy transparency.

The full text of the PTA http://www.rbnz.govt.nz/monpol/pta/index.html can be viewed on the Reserve Bank's website.

September 2012