NZ history of Inflation Rates

Monetary Policy By the end of this topic you will be able to : Describe and explain the use of monetary policy to control inflation. Describe and explain the use of regulation – Reserve bank Act 1989 – to control inflation

Functions of The Reserve Bank Operating monetary Policy to maintain Stability Promoting the Maintenance of a sound and Efficient financial System Meeting the currency needs of the public The Reserve Bank Act 1989: An act intended to promote the maintenance  of price stability  of a sound and efficient financial system

Policy Targets Agreement The Reserve Bank’s responsibilities are set out in the Policy Targets Agreement: a contract between the Minister of Finance and the Governor of the RBNZ Policy Targets Agreement: required to keep inflation between 1% and 3% in the medium term.

Monetary Policy Monetary Policy – Changing interest rates or the quantity of credit and money to influence the level of economic activity. Monetary Policy Tools Official Cash Rate Jawboning Open Market Operations

Monetary Policy Official Cash Rate (OCR) – Interest rate set by the Reserve bank to implement monetary policy, so as to maintain price stability The Reserve Bank in NZ now directly influences interest rates using the OCR. By setting the OCR the RBNZ is able to substantially influence short term interest rates. Short term interest rates have a big impact on the overall level of economic activity in the country and therefore on inflation.

Influence on Interest rates by OCR The reserve bank pays financial institutions 0.25% below the OCR for money deposited in the Reserve Bank settlement accounts The reserve bank charges interest at 0.25% above the OCR for overnight cash to banks. The Reserve Bank also sets no limit on the amount of cash it will take in or let out.

OCR The Reserve Bank reviews the OCR eight times a year. Only in exceptional circumstances would the Reserve Bank make unscheduled adjustments to the OCR. The OCR is much more simpler and easier understood than earlier systems.

Effects of the OCR Reserve Bank increases OCR from 2.5% to 3% Financial Institutions pay 3.25% on loans, up from 2.75% Financial Institutions get 2.75% on settlement accounts up from 2.25% Various Financial Institutions will then increase their own interest rates to consumers and producers. Consumption rate falls as consumers will begin to save more. Investment will fall as producers pay more interest on loans Aggregate demand for goods and services in the economy falls The Inflation Rate will fall

History Of the OCR s/ htmlhttp:// s/ html

Open Market Operations (OMO) The buying and selling of government securities (bonds) in the open market in order to expand or contract the amount of money in the banking system.  Purchases by the government of government bonds owned by banks inject money into the banking system and stimulate growth  Sales of government bonds by the government withdraw money from the banking system and contract the economy.

Jawboning ( Open Mouth Operations) The Reserve Bank lets the market know about what its expectations are for the future. This then lets markets predict as to what the RBNZ might do in the future and thus people will change behaviours to favour themselves in the future. The RBNZ Monetary Policy Statements are one example of how the RBNZ tells the financial markets (banks etc) about its actions.

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