Pre – 1989, New Zealand had experienced a rather dismal economic

performance. Labour markets and the economy as a whole were very inflexible

characterized by high levels of regulation and a centralized and rigid system.

There was a high level of government intervention through out the economy

where inefficient industries were protected by high tariffs.
 

The Reserve Bank had virtually no independence from the government and were

often obliged to finance government deficits, reduce unemployment or interest

rates and to generally follow the orders of the government. The Reserve Bank

Act of 1964 provided a group of unclearly defined objectives6  with no

indication of relative priority or how the bank was supposed to trade one off

against the other. This lack of clarity contributed to New Zealand having one of

the highest levels of inflation amongst the OECD countries.
 

1984 saw the election of a new Labour government which immediately initiated a

sweeping system of radical change to the mandate of the Reserve Bank. The

conflicting objectives were dropped for a single objective of targeting medium

inflation. Unnecessary political intervention and the requirement of the funding of

government deficits were abolished as well as all restrictions to the financial

system. This was later grounded in the Reserve Bank Act of 1989 giving the

bank independence that was previously unheard of in New Zealand. The distinct

features of the act compared to previous legislation can be seen below :

1. The primary objective is “the stability in the general level of prices”. (Section 8

RBA 1989). Previous legislation also specified objectives such as growth, full

employment, and balance of payment equilibrium.
 
 

2. The act does not define the term price stability but the Governor and the

Finance Minister are required to agree and publish specific targets for monetary

policy in a document called the Policy Targets Agreement ( PTA ).That explains

how the objective is to be attained. It currently sets down a CPI target of 0 - 2%

and specifies the circumstances in which CPI can deviate from this range.
 
 

3. Once the Finance Minister and the Governor agree on the target(s) the bank is

free to implement policy without reference to, or instruction from the Treasury.
 
 

4. The government, through a limited – life Order in Council, can unilaterally

override the primary objective. This override is in writing (thus very public) and

can only last for one year after which it must be renewed. In the occurrence of

this situation, a new PTA must be signed clearly specifying a new target.
 
 

5. The Governor can be sacked for failure to achieve the target stipulated in the

PTA in the agreed time period. As previously alluded to in 1, the PTA does

provide for situations such as an oil price shock where the Governor cannot be

held responsible for failure to achieve target(s). However, the banks board of

directors are changed with monitoring the Governors performance, and

recommending dismissal if the Governor is incapable of doing his job.