Understanding New Zealand’s Monetary Policy
The Reserve bank has a number of responsibilities as specified in the ‘Policy Targets Agreement’ (PTA) with the New Zealand Government.
The current agreement requires the Reserve Bank to maintain price stability and support maximum sustainable employment. Monetary policy is the RBNZ primary tool to pursue these goals and is undertaken through setting the Official Cash Rate (OCR), which is reviewed seven times a year.
- ‘Pricing Stability’ the PTA requires the Bank to keep inflation between 1 and 3 percent on average over the medium term with a midpoint of 2 percent.
- There is no numerical target relating to ‘maximum sustainable employment’ rather the RBNZ will monitor a number of economic factors to determine their fulfilment of this policy.
Monetary policy is an important consideration for a fixed income investor for several reasons.
- The OCR acts as an anchor for the markets expectations of short term interest rates.
- The Reserve Bank provides forecasts and insight into the current state of New Zealand’s economy. The state of the economy can have a direct influence on the level of return expected by fixed income investors.
- Inflation (and inflation expectations) are important in determining long term interest rates as fixed income investors seek to receive a positive real return when lending money.
More information can be found on the RBNZ website: https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy
Understanding New Zealand Financial Stability
The Reserve Bank of New Zealand is responsible for maintaining Financial Stability. The financial system has a critical role in supporting economic activity. The public needs to be confident that banks, non-bank deposit takers (NBDTs) and insurers can and will continue to provide these services, and that the payment and settlement systems will work as expected
More information about how the RBNZ ensures financial stability in New Zealand can be found here: https://www.rbnz.govt.nz/financial-stability
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