RBNZ: new PTA an “evolution”

McDermott said the central bank's new Policy Targets Agreement (PTA) would “reinforce the flexibility” of the central bank’s long-term approach.

Last month Finance Minister Grant Robertson and new Reserve Bank Governor Adrian Orr signed an agreement to require monetary policy to be be conducted so it contributes to supporting maximum levels of employment. RBNZ still has to keep annual CPI inflation between 1 and 3 percent over the medium-term, with a focus on keeping it close to 2 percent.

The new PTA triggered market fears of a radical change in direction for the central bank, but those concerns were quelled by McDermott today. He said the new PTA was a continuation of gradual policy change: “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,” he added.

McDermott said the creation of a five-to-seven member committee for monetary policy decisions reflected the need for a “great deal of judgement”. He added: “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.”

Dominick Stephens, chief economist at Westpac, said McDermott’s speech offered few clues about RBNZ’s direction: “The Government appears to be walking a fine line between appeasing long-term critics of monetary policy and reassuring financial markets that the RBNZ will remain focussed on inflation. Today's speech was consistent with that delicate balancing act, but contained no new details to inform either the inflation hawks or the doves.”