9 May, 2000

Government announces terms of monetary policy review

"The aim of the monetary policy review is to investigate ways of enhancing the Reserve Bank's ability to implement the PTA with minimal disruption to the economy," Finance Minister Michael Cullen said today.

"The Reserve Bank Act has been in effect for a little over ten years now and has been effective in combating inflation. I supported its introduction and continue to support its intentions.

"But it is appropriate to examine the Reserve Bank's operations and governance to ensure it has the tools it needs to do its job as effectively as possible with least volatility to interest rates and the exchange rate," Dr Cullen said.

"The terms of the review are strictly limited. The Government is strongly committed to maintaining the operational independence of the Bank and to Section Eight of the Act defining the maintenance of price stability as "the primary function of the Bank."

"These areas have been fenced off from the review," Dr Cullen said.

The review would be technical in nature and would require a person with a high level of expertise. It was the Government's intention to appoint a reviewer from overseas.

"We are now in the process of finalising the appointment and should be in a position to make an announcement soon," Dr Cullen said.

The review will consider:

 The way the Reserve Bank 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 Reserve Bank 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 Reserve Bank functions such as prudential oversight of financial institutions.
 Whether the Reserve Bank's communication of monetary policy decisions to the public and financial markets is as simple, clear and effective as possible.

"The total cost of the review, including the cost of using existing resources, is expected to be between $200,000 and $500,000.

"Recommendations arising from the review will be discussed with the Reserve Bank Governor, Dr Don Brash, before the Government makes any decisions on how to proceed," Dr Cullen said.

ENDS

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