Dual meaning
|The Reserve Bank’s new Policy Targets Agreement (PTA) reflects the Government’s desire for employment to be considered as part of monetary policy decision-making. The responsibility now lies with the Reserve Bank to figure out how to put this loosely worded objective into practice.
Last week, RBNZ Governor Adrian Orr and Finance Minister Grant Robertson signed a new PTA specifying that:
“The conduct of monetary policy will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy.”
The PTA goes on to define a numerical target for price stability, which is broadly unchanged from the previous version: future inflation will be kept between 1-3% over the medium term, with a focus on keeping it near the 2% midpoint. In contrast, there is no numerical target or definition of what constitutes maximum sustainable employment.
The lack of an employment target is appropriate, and is in line with the approach taken by other ‘dual mandate’ central banks such as the Reserve Bank of Australia and the US Federal Reserve. Monetary policy can affect labour market outcomes in the short term, but in the long run the unemployment rate is determined by structural factors that are beyond the control of the RBNZ. What’s more, the sustainable rate of unemployment is inherently unobservable, and may change over time.
Download The Full Weekly Commentary
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.