The Reserve Bank of New Zealand's pioneering inflation target

Facing inflation that had run persistently in double digits through much of the 1970s and 1980s, New Zealand's government and central bank adopted a framework in 1990 that no other country had yet tried in formal form: a legally specified inflation target written into the Reserve Bank of New Zealand Act of 1989, which took effect that year and made price stability the Reserve Bank's single statutory objective. The first Policy Targets Agreement, signed in March 1990 between the Minister of Finance and the Governor, set the target range at 0 to 2%, an explicit, published commitment that gave markets and wage-setters a clear benchmark against which to judge monetary policy credibility. Looking back on the framework's 35th anniversary, the Reserve Bank has described the original design as deliberately rigid, reflecting how badly inflation expectations needed re-anchoring after two decades of volatility, before the framework evolved into the more flexible approach used today. Within a few years inflation had fallen from double digits to within the target band, and the New Zealand approach became the template that dozens of other central banks, starting with Canada in 1991, later adopted in some form.