Monetary policy framework

Amendments to New Zealand’s monetary policy framework came into effect on 1st April 2019. The remit, charter and code of conduct are key components of the new framework. The remit provides the Monetary Policy Committee (MPC) with its operational objectives, consistent with the economic objectives in Section 8 of the Reserve Bank of New Zealand Act (1989).

The MPC will also be bound by the MPC charter and code of conduct. The charter provides directions on decision making procedures, transparency and accountability. The code of conduct sets out minimum standards of ethical and professional conduct that must be adhered to by members of the MPC.

Remit - effective from 1st April 2019

Monetary policy plays an important role in supporting the Government’s economic objective. The Reserve Bank of New Zealand Act 1989 (the Act) requires that monetary policy promote the prosperity and wellbeing of New Zealanders, and contribute to a sustainable and productive economy. Monetary policy contributes to public welfare by reducing cyclical variations in employment and economic activity whilst maintaining price stability over the medium term.

This remit is issued by the Minister of Finance to the Monetary Policy Committee (MPC) under Clause 3, Schedule 1 of the Act.

Read the remit for the Monetary Policy Committee - effective from 1st April 2019 (PDF 15.14KB)

The remit for the Monetary Policy Committee

Reserve Bank of New Zealand

The Government’s Economic Objective

The Government’s economic objective is to improve the wellbeing and living standards of New Zealanders through a sustainable, productive and inclusive economy. Our priority is to move towards a low carbon economy, with a strong diversified export base, that delivers decent jobs with higher wages and reduces inequality and poverty.

Context

Monetary policy plays an important role in supporting the Government’s economic objective. The Reserve Bank of New Zealand Act 1989 (the Act) requires that monetary policy promote the prosperity and wellbeing of New Zealanders, and contribute to a sustainable and productive economy. Monetary policy contributes to public welfare by reducing cyclical variations in employment and economic activity whilst maintaining price stability over the medium term.

This remit is issued by the Minister of Finance to the Monetary Policy Committee (MPC) under Clause 3, Schedule 1 of the Act.

1) Monetary Policy Objectives

a) Under Section 8 of the Act the Reserve Bank, acting through the MPC, is required to formulate monetary policy with the goals of maintaining a stable general level of prices over the medium term and supporting maximum sustainable employment.

2) Operational Objectives

a) For the purpose of this remit the MPC’s operational objectives shall be to:

i. keep future annual inflation between 1 and 3 percent over the medium term, with a focus on keeping future inflation near the 2 percent mid-point. This target will be defined in terms of the All Groups Consumers Price Index, as published by Statistics New Zealand; and

ii. support maximum sustainable employment. The MPC should consider a broad range of labour market indicators to form a view of where employment is relative to its maximum sustainable level, taking into account that the level of maximum sustainable employment is largely determined by non-monetary factors that affect the structure and dynamics of the labour market and is not directly measurable.

b) In pursuing the operational objectives, the MPC shall:

i. have regard to the efficiency and soundness of the financial system;

ii. seek to avoid unnecessary instability in output, interest rates, and the exchange rate; and

iii.discount events that have only transitory effects on inflation, setting policy with a medium-term orientation.

Agreed by:

 Hon Grant Robertson; Minister of Finance 

 

Adrian Orr; Governor of the Reserve Bank of New Zealand


Charter - effective from 1st April 2019

The Monetary Policy Committee (MPC) is responsible for formulating monetary policy directed at achieving the economic objectives of price stability and support of maximum sustainable employment, as set out in section 8 of the Reserve Bank of New Zealand Act (1989) (“the Act”) and in accordance with the remit. This charter aims to facilitate effective decision making by the MPC and ensure transparency of these decisions and the decision-making process, in order to aid the effectiveness of monetary policy and hold the MPC accountable.

Read the Monetary Policy Committee Charter - effective from 1st April 2019 (PDF 17.39KB)

Monetary Policy Committee Charter

Reserve Bank of New Zealand

Effective from 1st April 2019

The Monetary Policy Committee (MPC) is responsible for formulating monetary policy directed at achieving the economic objectives of price stability and support of maximum sustainable employment, as set out in section 8 of the Reserve Bank of New Zealand Act (1989) ("the Act") and in accordance with the remit. This charter aims to facilitate effective decision making by the MPC and ensure transparency of these decisions and the decision-making process, in order to aid the effectiveness of monetary policy and hold the MPC accountable.

1) Decision making

a) MPC members are tasked to abide by the code of conduct, and engage constructively with each other to achieve informed and timely monetary policy decisions. The MPC's decision making is enhanced by embracing diverse opinions that reflect, for example, members' unique personal and professional experiences and educational backgrounds. Members will respect each other's contributions and embrace any difference in view as a benefit of a diverse committee.

b)The MPC will seek consensus in decision making. This is to ensure that the MPC engages in in-depth discussions and a true exchange of perspectives regarding monetary policy strategy - including consideration of the expected time taken to achieve operational objectives, any trade-offs that arise, and communication of this strategy - before specific decisions are taken.

c) When consensus cannot be reached, specific policy decisions will be determined by a simple majority vote as per clause 44 of schedule 2 of the Act (which includes that the Governor, as chairperson, has a casting vote if required).

2) Transparency and accountability

a) The MPC will publish each monetary policy decision promptly on the Bank's website. The announced decision of the MPC will include a summary record of the MPC meeting that includes an overview of the economic outlook, the risks and policy options discussed, any material differences of view or judgement, and an unattributed record of any vote taken.

b) On a quarterly basis, the announced decision will also be accompanied by a Monetary Policy Statement that will, in addition to the requirements set out in section 15C of the Act:

(i) Explain how the MPC has sought to meet the requirements of section 2b in the remit; and

(ii) When inflation outcomes, and/or expected inflation outcomes, are outside of the target range explain the reasons for this; and

(iii) Explain how the current monetary policy decisions contribute to supporting maximum sustainable employment within the economy.

c) If the MPC decides that the Bank should intervene in financial markets, it shall also consider whether prompt publication of details of the decision would impede the achievement of the intervention's purpose. If so, the MPC may withhold such details until it deems that publishing them is no longer likely to create such impediment.

3) External communication

a) The MPC's communications - both collective and individual - should contribute to the overall effectiveness of the monetary policy decision, the public's understanding of monetary policy, and the accountability of the MPC.

b) The Governor (or another member of the MPC with the Governor's permission) will be the sole spokesperson for the official announcement of the decision.

c) In any public remarks regarding the MPC's policy strategy and decision, members are to draw on the MPC's official communications and on the Governor's media conference remarks where appropriate. Any non-public remarks on monetary policy or the economic outlook must be consistent with the MPC's official communications, to avoid providing, or appear to be providing, new information to a subset of individuals. A MPC member who wishes to publicly express his or her view around the balance of risks and/or economic outlook may, but should do so with respect for other members and the MPC as a whole. Members are to consult with the MPC within a reasonable timeframe in advance of any public communication, refrain from characterising the individual views of other MPC members, and ensure such communication is publicly advised in advance and on the record (on the Bank's website) in real-time.

d) Given financial market sensitivities, MPC members must refrain from any public communications relevant to monetary policy following receipt of MPC briefing papers and prior to the decision being announced.

Agreed by:

 

Hon Grant Robertson; Minister of Finance 

 

Adrian Orr; Governor of the Reserve Bank of New Zealand.


Monetary Policy Committee (MPC) Code of Conduct - effective from 1st April 2019

The code of conduct of the MPC sets out minimum standards of ethical and professional conduct that must be adhered to by members of the Committee. It was approved by the Reserve Bank Board on 19 February 2019.

Read the MPC Code of Conduct – effective from 1st April 2019 (PDF 498KB)

Monetary Policy Committee Code of Conduct

Reserve Bank of New Zealand

Effective from 1st April 2019
Approved by the Board of Directors 19th February 2019

Application

This code applies to all members of the Monetary Policy Committee (MPC), that is, both internal and external members.

Purpose

The code of conduct of the MPC sets out minimum standards of ethical and professional conduct that must be adhered to by members of the MPC.

Standards of Conduct

Members must formulate monetary policy consistent with the economic and operational objectives set out in the Reserve Bank of New Zealand Act (1989) (“the Act”) and the remit respectively, and consistent with the charter.

This code meets the requirements of the Act and is to be read subject to the MPC charter, which also includes expectations of members’ conduct, particularly placing constraints on members speaking in the public domain about the MPC’s activities.

Members must at all times act with honesty and integrity, in good faith, with respect for their colleagues and staff, and with reasonable care, diligence, and skill, having regard to the functions of the MPC.

Promoting participation and preparation

Members have an obligation to the MPC to:

  • Carry out their responsibilities in an efficient and competent manner and to a high standard of performance.
  • Contribute actively to and participate in MPC meetings, treating others’ contributions with respect at all times, and exchange ideas freely to promote excellence in the MPC’s deliberations.
  • Develop, enhance and maintain expertise in the subject matter of the MPC.
  • Continually seek to improve the effectiveness of their contribution.
  • Attend all meetings, except where absence is unavoidable and approved by the chairperson of the MPC.
  • Be adequately prepared to participate in meetings, including by reading any meeting papers supplied.

Conflict of Interest

Each member must:

  • Act in the interests of the Bank, and not pursue his or her own interests at the expense of the Bank.
  • Declare relevant interests through disclosure to the chairperson. The interests will be recorded in a register that will be shared with each member and administered by the MPC secretary.

There is a conflict of interest whenever a member’s duty or responsibility to the Bank could be affected by some other duty or loyalty (i.e. the member’s “interest”) that the member may have. Perception of a potential conflict of interest is as important a consideration as an actual conflict of interest.

In determining whether a conflict of interest exists, members should ask themselves: does their other interest or loyalty create an actual or perceived incentive for them to act in a way that may not be in the best interests of the Bank? Could it undermine public trust and confidence in a member or in the Bank? Would a reasonable outside observer conclude that a conflict of interest existed?

Members should err on the side of caution and treat the interest as a potential conflict of interest situation.

Disclosure of interests

If a member has an interest, they must disclose the nature of the interest, and the monetary value of the interest (if the monetary value of the interest cannot be quantified, a member must disclose the nature and extent of the interest) in the Interests Register, and to:

a) the MPC chairperson (i.e. the Governor, or Deputy Governor if the Governor is unavailable) or

b) the chairperson of the Board, if the MPC chairperson is unavailable, as soon as practicable after the member becomes aware that he or she is interested.

A member may make a standing disclosure (i.e. a disclosure of an interest with ongoing effect). A standing disclosure will continue in effect until the nature of the interest materially alters or the extent of the interest materially decreases.

A member is deemed to have an interest that must be disclosed if the member:

a) has a personal financial exposure to interest rate movements or foreign exchange trading, and may derive a financial benefit by changing that exposure from information being considered by the MPC ahead of a monetary policy decision (“monetary policy information”);

b) is the spouse, civil union partner, de facto partner, or is responsible for managing the affairs of a person who may derive a financial benefit from the monetary policy information;

c) is engaged in an employment, professional or consultancy capacity in a role for which monetary policy information is relevant (e.g. a treasury role, an FX trading role, or a role responsible for decisions about matters such as hedging interest rates).

Mortgages or other significant indebtedness

Members who have a financial exposure to interest rate movements, for example through home loans or other indebtedness influenced by decisions of the MPC, must record the exposure as an interest on the register. This includes the credit provider and the size of the indebtedness.

Members whose home loans (or other indebtedness influenced by the decisions of the MPC) are subject to fixed interest rates must record the term of the rate, i.e. when the fixed rate is scheduled to expire.

Consequences of failing to disclose an interest

The MPC chairperson must notify the Board of any failure by a member to disclose an interest, and of the actions affected, as soon as practicable after becoming aware of the failure.

Failure by a member to disclose an interest does not affect the validity of any decision taken by the MPC.

Management of conflict of interest

Having identified and disclosed an interest, the next step is to determine how it can be managed to avoid a conflict of interest. The management of some specific situations of conflict of interest are outlined below. Other situations of conflict of interest are managed as agreed with the chairperson.

Regular financial markets trading restricted

Members must not be personally or professionally involved, directly or indirectly, in regular trading in financial markets in which the Bank has, or might have, a significant influence. This includes domestic wholesale money, bond and foreign exchange markets, interest and exchange rate futures, options and swaps markets, instruments linked to such markets, equities listed on New Zealand exchanges, and prediction markets related to those issues in which the Bank might have a significant influence.

If prohibited interests are held by trusts in which the member has a beneficial interest, rather than by the member directly, the code will be breached if the member has material influence over the trust, such as ability to instruct the trustee as to investment choices. Where the trustee acts independently from the member, there is likely to be no conflict.

Fixed interest rates

A member must inform the chairperson if the fixed interest rate on his or her indebtedness is due to expire close to the time the MPC is scheduled to make a decision. The chairperson may exclude that member from the decision making at that time, or may, before the scheduled decision, require the member to satisfy the chairperson as to how his or her decision making on the fixed rate will not be influenced by monetary policy information.

'Blackout' periods

A member must not place any trade in a FX instrument, purchase foreign exchange in an amount of $10,000 or more, fix an interest rate on any indebtedness, place or renew a term deposit in an amount of over $25,000, or purchase or sell any equity or debt instrument listed on a New Zealand exchange following receipt of MPC briefing papers and prior to the decision being announced, without first informing the chairperson. The chairperson may prohibit such a transaction until after the MPC meeting.

Consequences of a conflict of interest for MPC meetings

A member who has a conflict interest must not, unless otherwise agreed by the chairperson:

a) vote or participate in any discussion or decision of the MPC in relation to the matter;

b) be regarded for the purpose of forming a quorum for the part of any meeting of the MPC during which a discussion or decision relating to the matter occurs or is made.

Confidentiality of information and prohibition on use of inside information

In the course of discharging their responsibilities as members of the MPC, members will have access to confidential Bank information on economic and financial market conditions, and monetary policy assessments. All such information must be kept confidential and may not be disclosed, or made use of, or acted upon, except:

a) in the performance of the MPC's functions;

b) as required or permitted by law; or

c) to the Chair of the Board, if necessary to comply with the requirement to disclose interests under this code;

d) as agreed by the MPC (if the disclosure, use, or act will be unlikely to prejudice the MPC).

Members must never act or enable others to act on private information acquired in the course of their work.

Members may act on information in the public arena that may result in a gain or avoid a loss to them or any other person, but it will be their responsibility, if challenged, to demonstrate that their action was not motivated by information acquired in the course of their duties. Perceptions of conflicts are also to be avoided and, if there is a circumstance where there could be a perception of conflict because of the information in the public arena and information acquired in the course of their duties, members should seek advice from the chairperson before acting.

Other ethical standards

A member must not use his or her position for personal gain. He or she must not solicit or accept gifts, rewards, or benefits which might compromise, or be seen to compromise, his or her integrity or that of the Bank, or be seen by others as either an inducement or a reward that might place the member under an obligation to a third party.

Breaches of the code

[To be read in conjunction with RBNZ Act Schedule 3, Part 2, clause 19]

Failure to adhere to the code of conduct is grounds for removal as a member. The Board may investigate any allegation of failure to adhere to this code and may recommend removal to the Minister.

Acknowledgement

I acknowledge that I have read, understood and agree to adhere to the contents of this code.

Member name, signature and date

Approved, chairperson name and date

Policy distributed to: The Reserve Bank of New Zealand's Board of Directors


Framework reviews

In May 2000, the Government initiated a review of New Zealand's monetary policy framework. It appointed Professor Lars Svensson of Stockholm University to conduct the review and to report by the end of February 2001. On 28 February, Professor Svensson's report was released under the title Independent Review of the Operation of Monetary Policy: Report to the Minister of Finance.

Read the Independent Review of the Operation of Monetary Policy: Report to the Minister of Finance (PDF 598KB)

7 August 2001

On 7 August 2001, the Reserve Bank Governor Don Brash issued a news release saying the announcement made by the Treasurer that "The Government has cross-party support for a series of minor changes to the Reserve Bank Act arising out of the Svensson Review of the Operation of Monetary Policy", was very welcome.

30 May 2001

On 30 May 2001, the Minister of Finance released his responses to the recommendations made in the Svensson report as the basis for consultations with other parliamentary parties.

Read the Minister of Finance's responses (PDF 21KB)

At that time the Reserve Bank responded to Professor Svensson's Report, as did the Bank's Non-Executive Directors Committee. The Treasury's advice to the Minister was also made public.

Read the Reserve bank's response

Read the Bank's Non-Executive Directors Committee (PDF 48KB)

Read the Treasury's advice (PDF 58KB)

More information on the review can be found on The Treasury's website

During the review, the Reserve Bank made public its submission, along with a number of supporting documents, and a separate submission of the non-executive directors of the Board of the Reserve Bank. These are outlined below.

Main Reserve Bank submission

Reserve Bank supporting papers

Term of Reference 1
Term of Reference 2
Term of Reference 3
Term of Reference 4
Term of Reference 5
Term of Reference 6

Non-executive directors' submission

In April 2007, at the request of the Government, Parliament's Finance and Expenditure Committee agreed to undertake an inquiry into the future monetary policy framework.

The terms of reference for this inquiry are as follows:

  • To consider the causes of inflationary pressures.
  • To consider the effectiveness of current monetary policy in controlling inflation.
  • To examine the interaction of monetary policy with other elements of the economic policy framework including fiscal policy.
  • To examine the New Zealand economy's capacity for non- inflationary growth, and how it can be improved.
  • To examine the role of productivity in the economy, how it can be improved, and the constraints upon it.
  • To examine the recommendations from recent examinations of monetary policy including the joint Treasury and Reserve Bank of New Zealand's report entitled Supplementary Stabilisation Instruments.
  • To consider additional measures that could enhance monetary policy in New Zealand.

Main submission

27 July 2007

The Reserve Bank's main submission contains all the key points (PDF 148KB)

Additional supporting papers

An additional 11 supporting papers provide more detailed material and background information. The supporting papers are as follows:

A1 Monetary policy framework and goals (PDF 93KB)

A2 A review of economic developments and monetary policy since 2000 (PDF 499KB)

A3 How similar is monetary policy in New Zealand, Australia, and the United States? (PDF 115KB)

A4 Why are New Zealand interest rates so persistently high by international standards? (PDF 58KB)

A5 Productivity, investment, exports and monetary policy (PDF 88KB)

A6 Supplementary Stabilisation Instruments project and the Macroeconomic Policy Forum (PDF 48KB)

A7 Other possible supporting policy initiatives (PDF 91KB)

A8 Prudential regulatory policy and the business cycle (PDF 59KB)

A9 Foreign exchange intervention (PDF 39KB)

A10 Possible improvements to macroeconomic statistics (PDF 46KB)

A11 Background material on monetary policy processes and accountability mechanisms (PDF 76KB)

Reserve Bank Board of Directors' Submission on Future Monetary Policy Framework

30 July 2007

The Reserve Bank Board of Directors have made a separate submission to the Finance and Expenditure Committee's Inquiry into the Future Monetary Policy Framework (PDF 46KB)


Other reviews

  • Review of the forecasting model used by the Reserve Bank

    June 2014
    This review by Dr Philip Turner, from the Bank for International Settlements, found that the model used by the Reserve Bank helps to discipline the policy debate and can expose incomplete thinking.
    A review of NZSIM model (PDF 740KB)

Prior to 2019, the Reserve Bank Act (1989) required that the then single target of price stability be defined in a specific and public contract, negotiated between the government and the Reserve Bank.

This was called the Policy Targets Agreement (PTA). The PTA changed over time, with the final agreement in March 2018, defining price stability as annual increases in the Consumers Price Index (CPI) of between 1 and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint. The final PTA also included a second objective of supporting maximum sustainable employment for the first time.