Bill English MP: RBNZ Policy Target Agreement

Bill is the Deputy Leader of the National Party, National’s Spokesman for Finance and MP for Clutha / Southland. He was first elected to Parliament in 1990 as MP for Wallace, a large rural electorate covering the deep south-west end of New Zealand. Bill was born in Dipton, Southland, and farmed in the area.

He completed a Bachelor of Commerce degree at Otago University, followed by a Bachelor of Arts (Hons) in English Literature at Victoria University in Wellington.

Bill held ministerial posts in education, health, revenue and finance and he was leader of the National Party from October 2001 to October 2003.

The Reserve Bank’s primary function, as defined by the Reserve Bank of New Zealand Act 1989 is to provide “stability in the general level of prices.”

The Reserve Bank is responsible for independent management of monetary policy to maintain price stability. The degree of price stability is determined through a Policy Target Agreement with the Minister of Finance. Also, Policy Target Agreements are public documents and hence a government cannot secretly change the targets to gain a short term surge in economic growth.

The mechanism of this is the Official Cash Rate (a percentage) which affects short term interest rates. The Bank will provide cash overnight at 0.25% above the cash rate to Banks against good security with no limit. Furthermore the bank will accept deposits from financial institutions with interest at 0.25% less than the official cash rate.

Banks that offer loans at interest higher than the official cash rate will be undercut by Banks that offer cheaper loans, and banks that loan out lower than the official cash rate will make less compared to other banks which can simply deposit their money in the Reserve Bank with a higher rate of return. The Reserve Bank borrows and offers loans with no limit on volumes in order to ensure that the interest rate in the market remains at the Official Cash rate level.

Through controlling this, the Reserve Bank can then influence short term demand in the New Zealand Economy and use this to control prices.

Adjustments to the official cash rate are made eight times a year. It can make unscheduled adjustments but does not usually do so.