New RBNZ PTA

The new policy targets argreement is out today.  What have we got?

For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint.

Oww I like this – actually stating the the implicit target IS 2%, not somewhere between 1-3%.  Improvement for sure.

In pursuing the objective of a stable general level of prices, the Bank shall monitor prices, including asset prices, as measured by a range of price indices. The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand.

I can understand including asset prices/credit growth in the PTA – its inclusion here seems a bit strange though.  Note that it is still only saying “look at how asset prices/other price indicies can forecast future growth in CPI”.  This change is on the face of it small, but maybe they see that the inclusion of asset prices itself could give them more scope to discuss it in statements.

In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner, have regard to the efficiency and soundness of the financial system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate.

Explicitly mentioning the Banks implicit role as the lender of last resort and as responsible for the stability of the financial sector.  I always felt that we should have “two PTA’s”, and “two institutions” to split these roles – but having it explicitly mentioned is an improvement.  Now, in this context it is still seperate from monetary policy – so the financial stability reports and monetary policy statements will continue to focus on seperate things.

In the news release with the statement:

Mr Wheeler also emphasised that the macro-prudential policy tools currently being developed by the Bank should be separate from, but complementary to monetary policy. “The primary purpose of such tools will remain to promote stability of the financial system.”

Excellent – as it helps to improve the clarity of communication, which helps to guide expectations.

“In addition, the PTA’s stronger focus on financial stability makes it clearer that it may be appropriate to use monetary policy to lean against the build-up of financial imbalances, if the Reserve Bank believes this could prevent a sharper economic cycle in the future.”

I don’t really like this comment much – and I would say there is no consensus about whether such a comment is appropriate at present … namely the linkage between monetary policy in of itself (apart from other regulatory tools) and financial stability is highly debatable.

However, I gave my view of it to Alex from Rates Blog:

It is a sticky comment – but I would interpret it along with the fact that macro-prudential and monetary policy tools are complements.  As a result, the full impact of both monetary policy decisions and choices on macroprudential policies will be taken into account when ensuring that the financial system is sufficiently “stable”.

It is the comment I’m least happy about, as it is the issue that is likely to cause the most confusion, and where we have the least understanding – however, their determination to keep “communication” of the issues separate solves most of the problem I have with it.  After all, monetary, fiscal, and financial stability policies are all “complementary” in some sense – they all require co-ordination – and they should all focus on clear goals.

It’s one of those things where we won’t actually know whether there is any effective change until we see him in action – the December MPS will be interesting.  In of itself, this PTA is more “hawkish” than the previous one – both changes (2% target, focus on financial stability) imply tighter financial conditions over time IMO.

Update:  Bernard Hickey comments.