The Reserve Bank of New Zealand Led the Way to Formal Inflation Targeting Followed by the Bank of Canada, the Bank of England, and the Reserve Bank of Australia

A tiny country on the southern edge of the earth, New Zealand, led the way into formal inflation targeting, followed soon by Canada and the UK. Additionally New Zealand had a connection to a central part of the neo-Keynesian doctrine that featured backstage to inflation targeting—the so-called Phillips curve (an empirical relationship between inflation and unemployment which had its origin in the work of a once New Zealand war hero, later a professor at the London School of Economics). The inflation targets as determined by these countries were very much improvised and set by governments seeking to keep their central banks on course to lowering inflation rather than growing out of a considered economic blueprint for a new experiment in fiat money stabilization. Work on that had been going on for many years within the economics profession as we shall see—but the implementation of an inflation-targeting regime in a large economy was still some time away.

Specifically, in the New Zealand launch, the impetus came from a finance minister keen to make the central bank accountable in a transparent way for its actions—with the action plan to bring inflation down from a then high level (around 5%). In 1989 the Reserve Bank of New Zealand Act came into force. The Act established the operational independence of the Reserve Bank in respect of monetary policy and specified price stability as the single monetary policy objective. Simultaneously the Minister of finance and the governor signed the first Policy Targets Agreement which specified an annual inflation target of 0–2%. (3–5% target for 1990, with a gradual reduction into the 0–2% range by 1992 (changed to 1993).

Canada followed New Zealand. In February 1991 a joint announcement by the minister of finance and the governor of the Bank of Canada established formal inflation targets. The target ranges were 2–4% by the end of 1992 and 1.5–3.5% by December 1995. Subsequently the range was lowered to 1–3%. The Bank of Canada is not directly accountable to the government via formal sanctions if it misses its targets as in New Zealand but rather like the Reserve Bank of Australia is accountable to the public in general.

The UK was the next country to adopt formal inflation targeting, following that country’s exit from ERM in October 1992. The government set the target (initially 1–4%) and invited the governor of the Bank of England to begin producing an Inflation Report on a regular quarterly basis which would report on the progress being made in achieving the target. At the time of adoption, inflation was at 4%. The British inflation-targeting regime was similar in flexibility to the Canadian framework (and Australian which started around this same time).

—Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a 21st Century Gold Standard (Cham, CH: Springer International Publishing, 2018), 13-14.