Principles governing our monetary tools
We developed the following set of principles to provide a clear framework for how we use our suite of monetary policy tools.
|Effectiveness||Tools are designed to provide a strong influence over inflation and employment, to ensure the monetary policy objectives are achieved.
|Efficiency||We 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 take into account the impact of the tools on financial system risks, to avoid the costs of financial crises.|
In addition to these principles, there are two operational considerations related to the practical implementation of effective monetary policy.
|Public balance sheet risk||We take into account the financial risks that the tools create for the Crown’s and our balance sheets, to protect public funds and central bank independence.
|Operational readiness||Use of the tools take into account the operational readiness of each tool, to ensure the transmission channels function as expected. This includes our readiness 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 are 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.
We want some flexibility in how we use 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 we were confident that other policies, for example prudential policies, would mitigate any build-up of financial system risks.