Policy Targets Agreement This agreement is signed under section 9 (4) of the Reserve Bank of New Zealand Act 1989 (the Act), by the Minister of Finance (the Minister) and the Governor of the Reserve Bank of New Zealand (the Governor). It replaces that signed on 16 December 1992. In terms of section 9 of the Act, the Minister and the Governor agree as follows: 1. Price Stability Target Consistent with section 8 of the Act and with the provisions of this agreement, the Reserve Bank shall formulate and implement monetary policy with the intention of maintaining a stable general level of prices, so that monetary policy can make its maximum contribution to sustainable economic growth, employment and development opportunities within the New Zealand economy. 2. Measurement of Price Stability (a) In pursuing the objective of a stable general level of prices, the Bank will monitor prices as measured by a range of price indices. The formal price stability target will be defined in terms of the All Groups Consumers Price Index (C.P.I.), being the measure that is monitored most closely by the public. (b) For the purposes of this agreement, 12-monthly increases in the C.P.I. of between 0 and 3 percent will be considered consistent with price stability. 3. Deviations From the Targets (a) There is a range of possible price shocks arising from external sources, certain Government policy changes, or a natural crisis which are quite outside the direct influence of monetary policy. The Bank shall generally react to such shifts in relative prices in a manner which prevents general inflationary pressures emerging. (b) This approach means that the C.P.I. inflation rate can be expected to move outside the 0 to 3 percent range in response to particular shocks. The principal shocks are considered to be: significant changes in the terms of trade arising from an increase or decrease in either import or export prices; an increase or decrease in the rate of G.S.T., or a significant change in other indirect tax rates; a crisis such as a natural disaster or a major disease-induced fall in livestock numbers which is expected to have a significant impact on the price level; a significant price level impact arising from changes to Government or local authority levies; and a movement in interest rates that causes a significant divergence between the change in the C.P.I. and the change in the C.P.I. excluding the interest costs component. (c) In the event of such shocks, the Reserve Bank shall be fully accountable for its handling of the price effects, and, in particular, for any movements outside the 0 to 3 percent band. In each Policy Statement made under section 15 of the Act, the Bank shall detail fully its estimate of the direct price impact of any such shock and the impact on the Bank's achievement of the price stability target. The Bank shall also detail what measures it has taken, or proposes to take, to ensure that the effects of such shocks on the inflation rate are transitory. 4. Renegotiation of the Targets The policy targets are established on the understanding that the monetary policy instruments available to the Bank are adequate to achieve the objective. The Governor shall inform the Minister if he considers that any changes in the availability or effectiveness of these policy instruments impair the conduct of monetary policy. The Minister and the Governor may then set new policy targets. 5. Implementation (a) The Bank shall implement monetary policy in a sustainable, consistent and transparent manner. (b) Each Policy Statement released by the Bank under section 15 of the Act shall contain a statement of how the Bank proposes to formulate and implement monetary policy to ensure that price stability is maintained over the succeeding five years. Signed in Wellington this 10th day of December 1996. DONALD T. BRASH, Governor of the Reserve Bank of New Zealand. BILL BIRCH, Minister of Finance.