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Monetary Policy Review

"Professor Lars Svensson's Review of the Operation of Monetary Policy is an intelligent and careful piece of work which will require an intelligent and careful response," Finance Minister Michael Cullen said on the report's release today.

"I agree with many of Professor Svensson's observations on the history of monetary management in New Zealand, particularly his criticism of the MCI which I was also critical of, regarding it always as mechanistic, clumsy and confusing.

"But the MCI was abandoned two years ago and Professor Svensson is much more complimentary about the conduct of monetary policy since then, describing it as "entirely consistent" with best international practice," Dr Cullen said.

The report recommends that the Bank should continue to interpret the 0 to 3 percent inflation range as a medium term target of 1.5 percent and that consideration be given to making this an explicit instruction when the Policy Targets Agreement next comes up for renegotiation.

"Clearly Professor Svensson does not attach any urgency to this recommendation because he sees it as entrenching rather than changing current practice. We do not have to rush into a decision today," Dr Cullen said.

On the governance side, Professor Svensson's principal recommendations are: · to establish an internal committee chaired by the Governor and comprising the two Deputy Governors and two senior Reserve Bank staff to take responsibility for monetary policy decisions · that the Governor and the two Deputy Governors no longer sit on the Bank Board.

"Again, we are under no pressure to rush into decisions. I want to ensure full consultation on all the issues with Dr Brash, the non-executive directors of the Bank and other interested parties.

"But, while I am determined to follow due process, I do not want to drag out the exercise unnecessarily. I have therefore asked Dr Brash to come back to me with the Bank's reaction to the report before the end of next month.

"In the interests of transparency, I will make the Bank's response public. I hope to be in a position to announce the Government's decisions on the Review before the end of May.

"On behalf of the Government, I would like to thank Professor Svensson and congratulate him on the quality of his work," Dr Cullen said.

Office of Hon Dr Michael Cullen


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