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The Reserve Bank will now have to consider employment outcomes when setting monetary policy but this may have less impact than feared, experts say.

March 26th 2018, 11:10AM

by Miriam Bell

Finance Minister Grant Robertson and incoming Reserve Bank Governor Adrian Orr today signed a new Policy Targets Agreement (PTA), which adds employment outcomes to the Reserve Bank’s price stability targets.

Under the new PTA, the Reserve Bank still has to keep future annual CPI inflation between 1 and 3 percent over the medium-term, with a focus on keeping it round the 2 percent mid-point.

But the new PTA also requires monetary policy to be conducted so that it contributes to supporting maximum levels of sustainable employment within the economy.

Massey University banking expert David Tripe says the inclusion of employment outcomes in the Reserve Bank’s work may not cause the bank to behave much differently to the way it has been.

Thirty years ago when changes were made to the way monetary policy was set it had negative impacts but the environment is different now, he says.

“Currently, inflation is at a moderate level and employment is also at a reasonable level.  The key to maintaining that is trying to avoid economic volatility and disruption.”

While trying to have multiple outcomes could end up with none being achieved well, in Tripe’s view the PTA appears to maintain inflation as its priority objective.

“It’s arguable that providing an environment of stable inflation is the best way to provide stable employment outcomes for people anyway.

“But taking care with how a policy is implemented can have an impact on the extent of the disruption on the economy and that is what is important for employment.”

Westpac chief economist Dominick Stephens thinks the new PTA will be a relief for markets that were worried the Reserve Bank might go soft on inflation or lose sight of inflation targeting.

The Reserve Bank’s shift to a dual mandate targeting both inflation and the labour market has been well signalled, but the devil was……….

Continue reading this article at the original source from GoodReturns.co.nz




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