Executive summary

• Monetary policy refers to those actions by the Reserve Bank which affect interest rates, the exchange rate and the money supply.
• The objective of monetary policy in New Zealand is low inflation.
• The main tool of monetary policy in New Zealand is the Official Cash Rate (OCR), which is the interest rate on overnight borrowing and lending between banks and the Reserve Bank.
• Changes to the OCR affect all short-term interest rates and, through these, the amount of spending in the economy and, consequently, inflation.
• Changes to interest rates also affect the exchange rate, which will affect the prices of imports and exports.
• The precise effect on inflation of a change to the OCR is difficult to predict, and usually occurs with a lag of a year or more.
• Besides inflation, monetary policy also impacts on economic growth, employment and the balance of trade, but only in the short-run.
• Other policies also affect inflation, and these policies need to be taken into account when setting the OCR.
• New Zealand’s monetary policy system is in many ways similar to those operating in other countries.