History of Policy Targets Agreements

Prior to 1 April 2019, the Bank operated within a framework whereby the 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. The first PTA signed in 1990 defined price stability as an inflation rate between 0 and 2 percent, to be achieved by December 1992. The Reserve Bank succeeded, achieving and maintaining inflation of around 2 percent from 1991.

Having brought inflation under control, the Reserve Bank began to focus more on the medium term outlook for inflation. This allowed for increased flexibility in monetary policy for stabilising the real economy. It also took into account lags in the transmission of monetary policy in affecting inflation and allowed for inflation to deviate from the target for short periods of time.

The initial objective of keeping inflation at 0 to 2 percent was replaced with a goal of 0 to 3 percent inflation in 1996, allowing for more flexibility in managing trade-offs. In 2002, the target was narrowed to 1 to 3 percent inflation over the medium term. Finally, in 2012 an explicit focus was given to the 2 percent mid-point of the 1 to 3 percent range. This was important as it cemented the anchoring of inflation expectations to the 2 percent target—whereas with a target range, inflation expectations may float to either end of the band depending on the economic outlook. By enshrining the Reserve Bank’s practice as a point-targeting 2 percent inflation in the PTA, the Reserve Bank safeguarded against the risk of inflation expectations gravitating to 1 or 3 percent in the future.

Throughout these changes, inflation was the primary objective in the PTA, as it was in the Reserve Bank of New Zealand Act (1989). However, it was far from the only economic variable of interest. The variability of employment and output—key indicators of the real economy—were considered when setting monetary policy. The final PTA, signed in 2018, added an additional policy objective: for the Reserve Bank to contribute to supporting maximum sustainable employment. This was to be pursued alongside the inflation target, and formed the basis for the first Remit.

The evolution of the Reserve Bank’s policy objectives can be seen in the table below.

   Early to mid - 1990s Late 1990s & 2000s 2010 - 2018 2018 - 2019
Time to target

Initially: target to be achieved by a set date.

Dec 1990: Annual inflation to remain inside the target band, and the Bank to calculate and explain deviations due to the shocks outside the Bank's control (explicit 'caveats')

Time to target implicitly lengthened; Bank to respond to general inflationary pressure.

List of shocks that could result in deviation from target became illustrative rather than exhaustive.

2002: medium-term focus made explicit.

Explicit medium-term focus has remained.
Secondary considerations   1999: Bank shall seek to avoid unnescessary instability in output, interest rates and the exchange rate.

2012: Bank to have regard to the efficiency and soundness of the financial system; Bank to monitor asset prices.

Other secondary considerations (stability of output, interest rates and the exchange rate) have remained.

2018: Dual mandate: the Bank must support maximum sustainable employment. 

Inflation still a primary objective. 

Financial stability still a secondary concern. 

Target definition 

Initially: 0-2 percent.

1996: 0-3 percent.

 2002: 1-3 percent. 2012: 1-3 percent, with a focus on the 2 percent target midpoint.

Inflation: 1-3 percent, with a focus on the 2 percent target midpoint.

Employment: no numerical target.

Further discussion of the evolution of New Zealand’s monetary policy framework can be found in this Bulletin article: An international comparison of inflation-targeting frameworks.

For copies of historical Policy Target Agreements documents please contact [email protected].