15 December 1997

New "more transparent" Policy Targets Agreement

Treasurer Winston Peters and Reserve Bank Governor Don Brash this afternoon signed a new and "more transparent" Policy Targets Agreement (PTA). The PTA is required by the Reserve Bank of New Zealand Act 1989 and details the Reserve Bank's inflation target.

Dr Brash commented: "All of the essential features of the previous PTA have been preserved, and in particular the commitment to keep consumer price inflation between 0 and 3 per cent.

"The most significant change in the new PTA is that it now defines the Reserve Bank's target in terms of 12-monthly increases in the All Groups Consumers Price Index excluding Credit Services (CPIX), as published by Statistics New Zealand. The previous PTA defined the target in terms of the All Groups Consumers Price Index including interest rates and the price of other credit services. This change is consistent with the recently-announced decision of Statistics New Zealand to exclude interest rates from the official CPI from 1999. The new PTA thus provides continuity between the current and future CPI measures.

"An important consequence of specifying the target measure in terms of the CPIX is that the principal difference between the CPI itself, the so-called headline measure of inflation, and the Reserve Bank's measure of underlying inflation will disappear, namely interest costs. For this reason the Bank has decided to cease calculating and publishing its measure of underlying inflation with immediate effect. This helps to make the new arrangement even more transparent than in the past.

"We have previously expressed some discomfort with being responsible for calculating underlying inflation, the benchmark against which our monetary policy performance is assessed. Although no serious observer has ever suggested that the Reserve Bank has `fiddled the number', there has been concern both inside and outside the Bank that it was the Bank which was making the calculation.

"The decision to move to the CPIX as the basic measure of inflation in the new PTA, and the related decision to cease publishing the underlying inflation measure, have no implications for the implementation of monetary policy. Nor do the decisions have any implications for monitoring the Reserve Bank's performance. The Bank remains accountable for any actual, or projected, deviations from the official target range for inflation. The Bank must continue to explain any temporary impacts on prices arising from events which may mask the underlying trend of inflation in the CPIX, which is the proper focus of monetary policy," Dr Brash concluded.

For further information contact
Paul Jackman
Communications Manager
Telephone 04 471 3671, home 04 479 5457, Email jackmanp@rbnz.govt.nz