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Incoming RBNZ Governor sees scope to lean against "imbalances"

Thursday 20th September 2012

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Incoming Reserve Bank of New Zealand Governor Graeme Wheeler says amendments to the policy targets agreement gives the bank more authority "to lean against the build-up of financial imbalances" in the economy.

Wheeler today signed the PTA with Finance Minister Bill English, who said he hadn't wanted to make big changes to an accord that "has served New Zealand well."

But the tweaks to the latest incarnation include a tighter definition of inflation targeting. In additional to keeping inflation between 1 percent and 3 percent on average over the medium term, the governor must "focus on keeping future average inflation near 2 percent."

Wheeler said focusing on the 2 percent midpoint for the consumer price index "will help better anchor inflation expectations."

An increased focus on financial stability will let the central bank be more proactive in going after build-ups of pressure in the economy to prevent bubbles bursting, such as in the property market before the global financial crisis.

The bank could act to "prevent a sharper economic cycle in the future," Wheeler said.

The new PTA leaves unchanged the requirement to "avoid unnecessary instability in output, interest rates and the exchange rate."

Wheeler and English also said the bank is working on developing a suite of other "macro-prudential policy" which "should be separate from, but complementary to monetary policy."

Labour finance opposition spokesman David Parker said the PTA should have given the central bank greater powers to lean against the strength of the kiwi dollar, currently above 82 US cents.

"Making changes to the Reserve Bank Act is essential to make the currency more competitive, to pay our way in the world and grow the jobs and incomes ordinary kiwis need," Parker said.

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