Principles governing our monetary tools

We have developed the following set of principles to provide a clear framework for how we will use a range of other monetary policy tools should the Official Cash Rate (OCR) reach zero.

Remit principles

Effectiveness

Tools would be designed to provide a strong influence over inflation and employment, to ensure that the monetary policy objectives are achieved.


Efficiency

We would take into account the distortionary impact of the tools on the efficient allocation of resources within the economy, including between various groups and sectors of the economy.


Financial system soundness

We would take into account the impact of the tools on financial system risks, to avoid the costs of financial crises.

In addition to these principles are two operational considerations related to the practical implementation of effective monetary policy.


Operational principles

Public balance sheet risk

We would take into account the financial risks that the tools would create for the Reserve Bank and Crown balance sheets, to protect public funds and central bank independence.


Operational readiness

Use of the tools would take into account the operational readiness of each tool, to ensure the transmission channels function as expected. This includes the readiness of the Reserve Bank to implement each tool and the readiness of financial markets and the New Zealand public to respond appropriately to the tools.


How the principles would work together

In many cases, the principles would be complementary. For example, monetary policy is more effective if it does not weaken the efficiency of the economy or cause financial instability. However, there could be conflict between some principles some of the time. For example, some tools could be highly effective but would create risks to the public balance sheet. In these circumstances, the Monetary Policy Committee would seek to balance the principles when making decisions on the use of tools.

It is desirable to provide some flexibility in how the Reserve Bank uses these tools because some are untested in New Zealand. Over time we will learn more about the tools and their impact on the principles. In addition, the importance of the principles could vary depending on the circumstances at the time. For example, the impact of monetary policy on financial system soundness could be of lower concern if the Reserve Bank were confident that other policies, e.g. prudential policies, would mitigate any build-up of financial system risks.

The principles recognise that the tools may operate differently from the OCR and, therefore, can have different side effects. Ultimately, the principles are designed to ensure that these tools would only be used to meet the Committee’s remit, as doing so is beneficial for New Zealand overall.

Supporting and background documents