Transcript NZ history of Inflation Rates

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
The Reserve Bank Act 1989: An act intended to promote the
maintenance
 of price stability
of a sound and efficient financial system
Operating monetary
Policy to maintain
Stability
Functions of
The Reserve
Bank
Meeting the
currency needs
of the public
Promoting the
Maintenance
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.
Official
Cash Rate
Monetary
Policy Tools
Open Market
Operations
Jawboning
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
• http://www.rbnz.govt.nz/monpol/statement
s/0090630.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.
http://www.nzdmo.govt.nz/securities/govtbonds
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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