What is the Policy Targets Agreement?
The Reserve Bank of New Zealand Act 1989 specifies that the primary function of the Reserve Bank shall be to deliver "stability in the general level of prices." Section 9 of the Act then says that the Minister of Finance and the Governor of the Reserve Bank shall together have a separate agreement setting out specific targets for achieving and maintaining price stability. This is known as the Policy Targets Agreement (PTA).
A new PTA must be negotiated every time a Governor is appointed or re-appointed, but it does not have to be renegotiated when a new Minister of Finance is appointed. The Act requires that the PTA sets out specific price stability targets and that the agreement, or any changes to it, must be made public. The PTA can only be changed by agreement between the Governor and the Minister of Finance (section 9(4)).
Note, however, that under the Reserve Bank Act the Government has the power (section 12) to override the PTA. It can do this by directing the Reserve Bank to use monetary policy for a different economic objective altogether for a 12 month period, though again it must make the instruction public. A new PTA must then be negotiated to cover the override period and another PTA must be negotiated when the override ends. In either case, if a new PTA cannot be negotiated, the Governor can be dismissed. So far, this override section has not been used.
There have been 12 PTAs so far since the passage of the 1989 Act. Adrian Orr and Finance Minister Grant Robertson signed the current PTA on 26 March 2018.
The PTA opens with the Government’s economic policy context for monetary policy. The PTA then has three main sections. The first section confirms that "the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices and that, in conducting monetary policy, the Bank will contribute to supporting maximum sustainable employment within the economy."
The second section has three main points. Firstly, it says that the price stability target will be defined in terms of the All Groups Consumers Price Index (CPI). The second point sets the Bank's inflation target at 1 to 3 per cent over the medium term, with a focus on keeping future average inflation near the 2 percent target mid-point. The third point speaks to the requirement for the Governor to take a broad view of economic factors when making decisions including: the efficiency and soundness of the financial system; avoiding unnecessary instability in output, employment, interest rates and the exchange rate; as well as events that impact on inflation temporarily.
Section 3 contains transparency and accountability requirements. The Monetary Policy Statement (MPS) is required to explain how the broader economic factors mentioned above have been taken into account; when actual or expected inflation outcomes are outside the target range, and the reasons why; and how monetary policy contributes to maximising levels of sustainable employment.
The PTA is a public document, and as such is an important part of monetary policy transparency.