New Zealand passes law returning central bank to single inflation mandate

By Lucy Craymer

WELLINGTON (Reuters) -New Zealand on Wednesday passed legislation returning the central bank’s mandate to a sole focus on inflation, removing the need to take employment into account when making monetary policy decisions.

The New Zealand government, which was sworn in earlier this month, campaigned on bringing inflation down and said key to this was making a change to the legislation that governs the priorities of the Reserve Bank of New Zealand (RBNZ).

In 2018, the central bank was tasked with a dual mandate of targeting low inflation and full employment, but it now reverts back to a focus on just low inflation under the newly passed RBNZ (Economic Objective) Amendment Bill.

“Over time, a single focus on price stability is the best way to achieve strong, consistent growth in employment,” New Zealand’s Finance Minister Nicola Willis after the passage of the bill.

The bill must now receive royal assent from the country’s governor general, which generally happens within seven days of parliament passing it and is just a formality and will then immediately come into effect.

This means it will be in place when the Monetary Policy Committee next meets in February for its cash rate decision.

“The amendment is consistent with advice the Reserve Bank has given in the past and helps to reiterate our focus on achieving low and stable consumer price inflation,” central bank board chair Neil Quigley said.

The change to the mandate is seen by markets as hawkish at the margins but unlikely to drastically impact monetary policy decisions in the short term.

The government has also issued a new charter, which sets out decision-making processes and transparency requirements for the monetary policy committee.

Under this charter, the RBNZ policy board will need to spell out a specific time frame for when inflation would be returned to the target band of 1% to 3% and specifically the midpoint of the band, and provide reasons for the assessment. Previously, they did not have to give guidance on the time frame, although under law they had to return it to within the target band over the “medium term.”

While employment has also been removed from the charter, the RBNZ is still required to explain the impact of monetary policy on the sustainability of house prices.

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