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Inflation Targeting: Ten Years On

Ten years of inflation targeting in New Zealand, since the passage of the Reserve Bank of New Zealand Act 1989, had made the price stability objective more durable, Reserve Bank Deputy Governor Murray Sherwin said today.

That's come in a speech entitled Inflation targeting: ten years on delivered in Rotorua to the New Zealand Association of Economists.

Mr Sherwin said: "What our inflation targeting regime has done is to give the initial political commitment to price stability a degree of durability that transcends the particular politicians or central bankers in place in 1989 when the RBNZ Act was passed into law."

Mr Sherwin's address reviewed the way inflation targeting, with price stability as its goal, grew out of the currency crisis of 1984, and then the subsequent development of the Policy Targets Agreement as a way of specifying in detail the Reserve Bank's inflation target.

He then described events since, saying a number of lessons had been learnt.

"What really matters in terms of (inflation) expectations is performance. It is the constant delivery of price stability that causes expectations to adapt to the new reality.

"Forecasting is difficult …It's a tough game, especially around the turning points of the cycle.

"What is happening internationally matters. Our financial markets are increasingly integrated with those abroad. Shocks, surprises and policy decisions elsewhere are reflected in our markets instantly. Monetary policy in New Zealand will inevitably be influenced by, and have to react to, developments abroad.

"The (inflation) target is at the front of our minds with each policy decision. I have no doubt that the framework has influenced the behaviour of the Bank's Monetary Policy Committee and the choices made by the Governor at key points.

"The framework has shifted the incentives from an acceptance of inflation arising from all the familiar pressures towards a more robust resistance to any future re-emergence of inflationary tendencies," Mr Sherwin concluded.

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