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History of the remit and policy targets agreement
This page provides a history of the development of our monetary policy remit, which before 2019 was called a policy targets agreement.
The remit for the Monetary Policy Committee (MPC) outlines the objectives that the MPC must use monetary policy to pursue, as set by the Minister of Finance.
Before 1 April 2019, our Governor had sole legal responsibility for monetary policy, and monetary policy objectives were outlined in a policy targets agreement (PTA) with the Minister of Finance.
Reining in inflation
The first PTA, signed in 1990, defined price stability as an inflation rate between zero and 2%, to be achieved by December 1992. We succeeded, achieving and maintaining inflation of around 2% from 1991.
A medium-term focus
Having brought inflation under control, we began to focus more on the medium-term outlook for inflation. This allowed for more flexibility for monetary policy to stabilise the real economy. It also recognised that monetary policy affects inflation with a lag, so it allowed for inflation to deviate from the target for short periods of time.
The initial objective of keeping inflation between zero to 2% was replaced with a target band of zero to 3% inflation in 1996, allowing for more flexibility in managing trade-offs. In 2002, the target range was narrowed to 1% to 3% inflation over the medium term.
Anchoring inflation expectations
Finally, in 2012, an explicit focus was given to the 2% mid-point of the 1% to 3% target range. This was important to anchor inflation expectations to 2%. Without a mid-point target, inflation expectations may float to either end of the 1% to 3% band, depending on the economic outlook. In practice, we were already point-targeting 2% inflation, but formalising it in the PTA had a stronger effect on anchoring inflation expectations.
Our dual mandate and Monetary Policy Committee
Since 1990, inflation has been the main objective in the PTA and the Reserve Bank of New Zealand Act (1989) (the Act). However, we also considered the variability of employment and output – key indicators of the real economy – when setting monetary policy. The final PTA, signed in 2018, added an additional policy objective: for us to contribute to supporting maximum sustainable employment (MSE). This was to be pursued alongside the inflation target.
The Act was amended in 2018, shortly after employment was added as a PTA objective. The new Act replaced the Governor as sole decision-maker with a Monetary Policy Committee (MPC) as the decision-making body. It also formally introduced a dual mandate of promoting price stability and supporting maximum sustainable employment.
Under the new Act, the remit for the MPC replaced the PTA. The first remit for the new MPC was introduced in 2019 when the Act amendments came into effect.