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UPDATE: RBNZ policy targets amended with government objectives

By Paul McBeth

Friday 19th December 2008

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The Reserve Bank of New Zealand must now be mindful of government policy objectives when it sets monetary policy, according to an amended Policy Targets Agreement signed by Governor Alan Bollard and Finance Minister Bill English.

A new clause has been added to the PTA stating that "The government's economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders. Price stability plays an important part in supporting this objective".

Under the PTA, the central bank is required to keep annual inflation between 1% and 3% on average, over the medium term. Inflation accelerated to more than 5% in the third quarter and is expected to dissipate rapidly as demand falters in a shrinking economy.

English and Bollard reiterated their support for the PTA as the best way to help the economy return to "a sustainable, stronger growth path over time, notwithstanding the current very difficult international environment, according to the statement.

"There will be no change to the way policy is implemented," said Michael Gordon, markets economist at Westpac Banking Corp. "I'd be surprised if there's any real change."

Bollard this month slashed the official cash rate by 150 basis points to 5% to revive the economy, amid signs of a prolonged worldwide economic slump.

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