Evolution in inflation targeting

Release date
12 April 2018

New Zealand’s inflation targeting framework has evolved significantly over the past 30 years, Reserve Bank Assistant Governor and Head of Economics John McDermott said in a speech today.

In his speech Inflation targeting in New Zealand: an experience in evolution, delivered at a conference in Sydney by RBNZ Economics Adviser, Rebecca Williams, Dr McDermott said that including employment into the Reserve Bank’s mandate will help reinforce the flexibility of inflation targeting.

Fighting inflation has been the Reserve Bank’s main purpose since 1989. Dr McDermott explained that since then there had been four key aspects of the Reserve Bank’s framework – a single objective, a single decision maker, operational independence, and transparency.

“Over the course of thirty years we believe the framework has served New Zealanders well. There are two key aspects of the framework that remain as important today as they were in 1989. These are operational independence and transparency.

On the change to dual objectives of inflation and employment, Dr McDermott said: “The Reserve Bank has always had regard to developments in the labour market, and this has been encouraged by our increasingly flexible approach. We regularly assess the available labour market data and are committed to discussing labour market developments. So my current sense is that, to a large extent, the changes help reinforce the flexibility in our approach.

“Specifying a numerical target for inflation but leaving the employment target as a qualitative objective is consistent with the practice here in Australia, and in the United States too.”

On the forthcoming change to a decision-making committee, Dr McDermott said: “We agree that the single-decision maker model has become less relevant over time. In reality, Reserve Bank Governors have a long history of utilising advisory committees. The flexibility of our approach to inflation targeting requires a great deal of judgement, and the use of a committee maximises the knowledge and experience of members individually and as a collective.”

Dr McDermott said: “Transparency in meeting our objective is as important for anchoring long-term inflation expectations now as it was in 1989, when the framework started. We will be using new communication techniques, such as publishing non-attributed records of meetings that reflect any differences of view among the Monetary Policy Committee.”   “The New Zealand framework has changed significantly over thirty years, reflecting lessons learned and the changing economic and political environment. We are about to enter the next stage of that evolution,” he said.

Read the speech: Inflation targeting in New Zealand: an experience in evolution

Reserve Bank media contact:
Angus Barclay, External Communications Adviser
Phone +64 4 471 3698 or +64 27 337 1102.
Email angus.barclay@rbnz.govt.nz