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Monetary policy in Australia and NZ converges


Monetary policy in Australia and NZ converges

Reserve Bank Governor Don Brash has today told an Australian audience that "The inflation targeting frameworks in Australia and New Zealand are now very similar."

Speaking to the Trans-Tasman Business Circle in Melbourne, Dr Brash said: "Both countries are now clearly and explicitly "inflation targeters". Both countries run policy by setting a short-term interest rate. Both countries forecast and react to expected future inflation. And the central banks of both countries take flak from all sides whenever monetary policy is tightened!

"There are a few differences, but in most cases these are more apparent than real. For example, Australia's use of a '2 to 3 per cent on average over the cycle' target, while expressed differently, is quite similar to the approach now adopted in New Zealand with a 0 to 3 per cent per annum target, with not too much concern over temporary breaches of the bottom or the top of this range."

This came as part of a wide-ranging speech that reviewed monetary policy in New Zealand in recent years and how it compared with Australia's experience.

Dr Brash said the Reserve Bank was required to "seek to avoid unnecessary instability in output, interest rates and the exchange rate", this now being explicit in the Bank's revised Policy Targets Agreement with the Government.

"The appreciation of New Zealand's real exchange rate in the mid-nineties was not in fact out of line with real exchange rate appreciations experienced during the nineties by a number of other much larger countries with floating exchange rates, such as the United States and the United Kingdom. It was very much smaller than the real exchange rate appreciation experienced by Japan during the nineties. These countries approach monetary policy in various ways, and their experience makes me reluctant to promise that we in New Zealand will necessarily be able to avoid big exchange rate appreciations in the future. But we certainly intend to try."

"The best way of reducing the risk of a repetition … is to ensure that monetary policy avoids a situation where inflationary pressures build up too big a head of steam, with the consequence that policy has to be tightened aggressively for a prolonged period. Far from being inconsistent with the new clause in my agreement with the Minister of Finance, as some have suggested, our decision to increase the Official Cash Rate last month was absolutely consistent with that clause," Dr Brash concluded.


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