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Monetary Policy Framework

This page sets out the details of the remit, charter and code of conduct that together form the monetary policy framework under which the Monetary Policy Committee operates and makes decisions.

About the framework

Amendments to New Zealand’s monetary policy framework came into effect on 1 April 2019. The framework has three key components:

  • the remit
  • the charter
  • the code of conduct.

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 Act). A replacement remit came into force on 1 March 2021.

The MPC is also bound by a 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 MPC members must adhere to.

Read about the members of the Monetary Policy Committee

Remit

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 while maintaining price stability over the medium term.

Current remit

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. The government’s 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. An effective functioning housing market is a critical component of a sustainable and inclusive economy and promotes the maintenance of a sound and efficient financial system.

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 promotes the prosperity and wellbeing of New Zealanders and contributes to a sustainable and productive economy. Monetary policy contributes to public welfare by reducing cyclical variations in employment and economic activity while 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

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

  1. For the purpose of this remit, the MPC’s operational objectives shall be to:
    1. keep future annual inflation between 1% and 3% over the medium term, with a focus on keeping future inflation near the 2% midpoint. This target will be defined in terms of the All Groups Consumers Price Index, as published by Statistics New Zealand
    2. 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.
  2. In pursuing the operational objectives, the MPC shall:
    1. have regard to the efficiency and soundness of the financial system
    2. seek to avoid unnecessary instability in output, interest rates and the exchange rate
    3. discount events that have only transitory effects on inflation, setting policy with a medium-term orientation
    4. assess the effect of its monetary policy decisions on the government’s policy set out in subclause (3).

The government’s policy is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.

Hon Grant Robertson, Minister of Finance
Adrian Orr, Governor of the Reserve Bank of New Zealand

Read about the history of the remit

Public consultation – Monetary Policy Remit Review (2022)

The first phase of this public consultation is now open – closes 15 July 2022

The Reserve Bank of New Zealand Act 2021 requires the Bank to advise the Minister of Finance at least every five years on whether the Monetary Policy Committee’s Remit and Charter should be replaced, amended or remain in force. This regular process of review ensures that the operational monetary policy framework remains fit for purpose in a changing world.

We are required to provide advice to the Minister by November 2023. In preparation for this advice, we have begun reviewing the current Remit and will be consulting the public in two stages during 2022.

The first stage of public consultation will commence in June 2022. During the first consultation, we would like to hear from individuals and businesses about any changes that could better support the wellbeing of New Zealanders both now, and through whatever economic shocks and changes may come our way.

Later in 2022, we will consult on specific options for changes to the operational framework for monetary policy. A Review and Assessment of the operation of monetary policy in recent years will also be published.

Charter

The 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 Act and in accordance with the remit.

The charter aims to facilitate effective decision-making by the MPC and ensure transparency of these decisions and the decision-making process, to aid the effectiveness of monetary policy and hold the MPC accountable.

The charter was amended in March 2021 to account for the replacement remit, and came into force on 2 March 2021.

Current charter

Monetary Policy Committee charter

Reserve Bank of New Zealand

This charter is issued and comes into effect on the day it is signed by both the Minister of Finance and an authorised representative of the Monetary Policy Committee (MPC).

The 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, 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 described in 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 our 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 2(2) in the remit

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

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

c) If the MPC decides that we should intervene in financial markets, it shall also consider whether prompt publication of decision details 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. An 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 our 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

Download the Monetary Policy Committee Charter

Code of conduct – effective from 1 April 2019

The Code of Conduct came into effect on 1 April 2019.

The MPC code of conduct sets out minimum standards of ethical and professional conduct that MPC members must adhere to. It was approved by our Board on 19 February 2019.

The MPC’s risk appetite statement

The MPC faces a range of risks when formulating policy – some of which are unavoidable. The MPC has recently defined the specific risks it faces and has detailed a Risk Appetite Statement (RAS) for the first time to outline its appetite for each type of risk

Read the MPC's risk appetite statement (PDF 198KB)

The Reserve Bank of New Zealand Act (1989) underpins the Monetary Policy Committee’s (MPC) purpose, which is to promote the prosperity and well-being of New Zealanders, and contribute to a sustainable and productive economy. The MPC is mandated to do this by formulating monetary policy to achieve and maintain stability in the general level of prices over the medium term and support maximum sustainable employment, subject to secondary considerations. In doing so, the MPC is guided by the operational objectives set out in the MPC Remit. The MPC’s Charter further outlines the duties and responsibilities for the MPC in an operational sense.

Defining the risks

The MPC aims to maximise the operational objectives in the Remit while not taking undue risk. Undue risk can be defined as risks over and above those outlined in its RAS below. The purpose of the MPC’s RAS is to distinguish between necessary and undue risk. It summarises the MPC’s willingness to take on different types of risks to best fulfil its mandate.

The MPC’s willingness to take on some types of risk must be guided by its legal mandate. Some, such as the financial risk borne by the Reserve Bank as a consequence of the MPC’s monetary policy decisions, will also be heavily influenced by the risk preferences of the Reserve Bank.

The MPC’s risk appetite is categorised as high, medium or low in the RAS. Definitions for each level of risk can be found in table 1. The types of risk the MPC is exposed to (operational, legal, reputational and financial) are defined with examples in table 2.

Table 1: Defining the risk appetite level

Risk appetite Description
High appetite The MPC readily accepts exposure to these risks, as they are central to the pursuit of its mandate. Managing them on an appropriate risk-reward basis is one of its core competencies
Medium appetite The MPC accepts exposure to these risks, but on a controlled basis. These risks contribute to the achievement of its mandate but may come at a material cost, and are taken on a modest basis.
Low appetite The MPC generally avoids these risks, as they have the potential to undermine its ability to achieve its mandate. When these risks arise, extra measures are taken to mitigate them.

 

Table 2: Defining the risks faced by the MPC

Risk Definition and examples
Operational The risk that disruptions to people, systems, and processes impact the MPC meeting and the effective formulation of monetary policy.
  • One or more MPC members can’t meet due to illness, technical difficulties or similar issues.
  • MPC members can meet, but they don’t have the best information or resources available to make a decision.
  • MPC must make decisions under less than ideal conditions – e.g. without sufficient time for deliberation.
MPC can make a decision, but doesn’t have the resources to communicate it well.
Legal The risk that the MPC does not fulfil its lawful mandate and is subject to legal challenge. Lawful mandate covers the Act, Remit, Charter, and Code of Conduct.
  • The legality of MPC monetary policy decisions is legitimately questioned.
An MPC member is found to have acted illegally.
Reputational
The risk that damage to credibility results in a loss of stakeholder trust or confidence in monetary policy and/or the MPC.
  • MPC policies produce poor outcomes.
  • MPC policies produce good outcomes, but are received poorly by the public or other key stakeholders.
  • Monetary policy credibility is lost.
The reputation of the MPC or MPC members is compromised by factors other than policy choices.
Financial The MPC bears no financial risk as a committee, but has the responsibility to set policies which may cause significant financial risk to be borne by the Reserve Bank and the Crown.

 

The MPC’s risk appetite statement

Risk type Risk appetite statement Success indicators
Operational The MPC has low appetite for directing the Reserve Bank to undertake policies that would exceed its operational capacity, or lead to a policy being launched without sufficient preparation.

The MPC has low appetite for making decisions without thorough deliberation and a sound understanding of the information available at the time. However, it operates in an inherently uncertain environment, therefore the MPC necessarily has a high tolerance for setting policy under uncertainty.

The MPC has low appetite for making a decision without all members contributing, but is flexible with respect to how members come together to deliberate.

The MPC has medium appetite to test new internal systems and processes, seeking continuous improvement in the way it operates.
Monetary policy is formulated in line with the capacity of the Reserve Bank.

The MPC is forward-looking regarding potential policy tools and directs the Reserve Bank to prepare its operational needs in line with expected future policy needs.

The MPC can meet and formulate policy as scheduled.
Legal The MPC has very low appetite for legal challenge, and no appetite for acting illegally. Monetary policy decisions are explained and justified in the Monetary Policy Statement.

Record of meeting reflects consideration of a broad range of information, robust discussion, and acknowledgement of secondary considerations.

Members continuously seek to reach consensus.
Reputational The MPC recognises the importance of credibility for effective monetary policy. It has low appetite for policies or decisions that could cause inflation expectations to become unanchored.

The MPC has moderate appetite for external criticism and challenge, and will respond as necessary to maintain its legal licence to operate.

The MPC has high appetite to learn from its international peers and to design and test new or novel policies to respond to uncharted economic conditions.
Medium-to-long-term inflation expectations are anchored near the target midpoint.

Market rates (e.g. OIS) move as intended when implementing monetary policy.

Inflation and employment are near, or forecast to converge towards, their respective targets.
Financial The MPC bears no financial risk as a committee, but has the responsibility to set policies which may cause significant financial risk to be borne by the Reserve Bank. For this reason, the MPC is guided by the Reserve Bank’s internal risk appetite and institutional arrangements in these areas.

 

Risk type Low Medium  High
Operational New systems and processes  
Legal  
Reputational External challenge Learning from international peers and innovative or novel policy 
Financial  ✔    

 

Note: A tick denotes the default risk tolerance level, with exceptions listed in italics. The MPC has not established an appetite for financial risk, as it does not bear any financial risk as a committee.