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Lars Svensson to conduct monetary policy review

Data Flash (New Zealand)

Monetary Policy Review

Professor Lars Svensson to conduct monetary policy review

Finance Minister Cullen today announced that Professor Lars Svensson will conduct the review of New Zealand monetary policy. The terms of reference of the review had been made public earlier this month.

The Person

* Lars Svensson, Professor of International Economics at Stockholm University, is considered one of the world's leading authorities on monetary policy. He is also an adviser to the Swedish central bank.

* Professor Svensson was a Visiting Professorial Fellow at Wellington's Victoria University in 1997. In a paper written at the time, he supported the RBNZ's shift to a more medium-term policy focus.

Terms of Reference of the Review The review will consider:

* The way the RBNZ interprets and applies the inflation target set out in the Policy Targets Agreement, with a view to ensuring that this approach to achieving medium term price stability is consistent with avoiding undesirable instability in output, interest rates and the exchange rate.

* Whether the RBNZ has an adequate range of instruments and is using its current instruments effectively in altering monetary conditions in the desired direction.

* The range of sources, availability, type and timeliness of data, and the impact of these variables on forecasting and decision- making.

* Whether the policy decision-making process and accountability structures promote the best outcomes possible.

* The co-ordination of monetary policy with other elements of the economic policy framework, including an evaluation of the relationship between monetary policy operations and other RBNZ functions, such as prudential oversight of financial institutions.

* Whether the RBNZ's communication of monetary policy decisions to the public and financial markets is as simple, clear and effective as possible.

The Process

* A secretariat, consisting of senior RBNZ and Treasury staff members, will support the review process. A call for public submissions is expected to be made soon.

* Professor Svensson will come to New Zealand in November to conduct hearings on those submissions before returning to Sweden and writing his report. He will present his conclusions in February of next year.

* Recommendations arising from the review will be discussed with RBNZ Governor Brash, before the Government makes any decisions on how to proceed.

Our View

* The review is going to be relatively low key, with the terms of reference strictly limited. The RBNZ's independence and monetary policy's sole focus on price stability are not up for discussion.

* However, there is a reasonable probability that the governance structure of the RBNZ will be changed, with the responsibility for monetary policy shifting from the Governor to a newly established RBNZ Monetary Policy Board. Such a Board would include external members, as well as senior RBNZ staff - similar to the arrangements in Australia and the UK.

* We view a change to the 0-3% inflation target as unlikely, although it cannot be ruled out completely. The arrangements in Australia may again serve as a model: a 2-3% target, to be achieved on average over the cycle.

* It is our assessment that none of those changes would cause undue concern in financial markets.

Ulf Schoefisch, Chief Economist, New Zealand

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