New government, new monetary policy framework

Abstract

The new Labour-New Zealand First coalition Government has indicated it would review the Reserve Bank Act, with consideration of “full employment” to be added to the central bank’s inflation target when setting monetary policy. Monetary policy has been extraordinarily loose in the major economies in the wake of the Global Financial Crisis (GFC). Despite that, growth and inflation in the major economies have been slow to pick up. In contrast, asset prices have surged, and household debt levels have expanded rapidly. This divergence between subdued general consumer price inflation and accelerating asset price inflation has raised questions about whether the current monetary policy framework, both abroad and here in New Zealand, is fit for purpose.