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Summary (continued)
Macroeconomic Policy
In the area of macroeconomic policy, the Reserve Bank Act 1989 and the Public Finance Act 1989 (as amended in 2004) continue to set the framework. In June 2006, the New Zealand Treasury and the Reserve Bank of New Zealand co-hosted a Macroeconomic Policy Forum that brought together international and domestic experts to examine New Zealand's macroeconomic framework. The overall assessment of the invited speakers and participants was that the essential elements of New Zealand's macroeconomic policy institutions are sound and appropriate.
Further assessment of the macroeconomic policy framework has been undertaken as part of an enquiry into the operation of monetary policy in New Zealand by Parliament's Finance and Expenditure Select Committee. The Committee's report presented to Parliament in September 2008 largely endorsed the current monetary policy framework, with recommendations to improve the information available to policy makers and to strengthen the institutional focus on increasing productivity growth.
Monetary Policy
The focus of monetary policy is on maintaining price stability. A Policy Targets Agreement between the Governor of the Reserve Bank of New Zealand and the Minister of Finance sets out the specific targets for maintaining price stability, while seeking to avoid unnecessary instability in output, interest rates and the exchange rate. The most recent Agreement was signed in December 2008 after the new government took office. There were no substantive changes to the Agreement. For the purpose of the Agreement, the policy target is to keep future CPI inflation outcomes between 1% and 3% on average over the medium term.
From 2004 until mid-2008, monetary policy was in a tightening phase with the Reserve Bank increasing the Official Cash Rate (OCR) by a total of 325 basis points from 5.0% in January 2004 to a peak of 8.25% in July 2007. The policy tightening reflected a prolonged period of strength in the domestic economy which left productive resources stretched and led to a rise in non-tradable inflation. In line with moves by central banks around the world, the Reserve Bank commenced an easing cycle in response to the international financial crisis. The OCR was reduced by 150 basis points in December 2008 and again in January 2009 following smaller cuts at each of the previous three rate reviews. At the end of January 2009, the OCR stood at 3.5%.
Recent statements from the Reserve Bank, the latest being in January 2009, suggest that the easing cycle will continue despite annual CPI inflation falling back to 3.4% in the December quarter 2008. The financial crisis is expected to slow growth in domestic demand, reducing non-tradable inflation pressure, while falling oil prices should also ensure that inflationary pressures ease. The Bank noted that the current policy settings are consistent with inflation returning within the target band over the medium term as both tradable and non-tradable inflation looked set to ease.
Fiscal Policy
On the fiscal front, the 1990s saw a consolidation of the country's fiscal position with the Fiscal Responsibility Act (now Part 2 of the Public Finance Act 1989) ensuring that fiscal policy is prudent and transparent. The government remains committed to maintaining a sound fiscal position.
In 2007/08, a surplus on the government operating balance of $2.38 billion was achieved. This compares with a surplus of $8.66 billion in 2006/07 and $11.48 billion in 2005/06. An operating deficit of $4.3 billion is forecast for 2008/09 (December Update - main scenario).
The new government has announced that it will set new fiscal objectives in the 2009 Fiscal Strategy Report to be published on 28 May 2009 in conjunction with the 2009 Budget.
Direct Public Debt
At 30 June 2008, New Zealand's gross direct public debt was $31.9 billion, or 17.7% of estimated GDP. At the same date, public sector foreign-currency debt was $2.0 billion, and interest charges on foreign-currency debt were $69 million. The government has no net foreign-currency debt.