two, during which we have seen a dramatic increase in real estate prices in many areas throughout the country - arguably too much so. and this reflects the inherent volatility of real estate prices, whether in housing, farm land, commercial property or industrial property. investors need to be mindful that the laws of gravity apply not only to newton's apple - they also apply to asset prices, including house prices. in real estate, the " laws of gravity " relate to things like population, income, household formation and the earning potential of the asset. and this is where the low inflation environment matters for those who borrow to invest in real estate. in the 1970s and 1980s, there were sharp falls in real terms in house prices and other property prices typically immediately following a period of dramatic increases - but it was comparatively rare for prices to fall in nominal terms. this meant that if someone were forced to sell in a downturn, the value of the house would probably still be above the value of the debt on the house. inflation would have shielded the investor from insolvency, at least in that respect. in contrast, in a world of low inflation, fluctuations in house prices can result not only in falls in real terms, but also falls in nominal terms. the risk for investors who borrow almost all of a house's sale price is that the value of the house could fall below the debt they owe. that is probably fine, as long as the investor can continue to service his or her debt. but it could cause real problems in the event that the debt can no longer be serviced - such as when interest rates rise sharply, or incomes fall. in that situation, if the investor is not covered by mortgage protection insurance and is forced to sell the property during a downturn, his or her insolvency on paper might become very real indeed. in view of the increase in household debt in the last 10 years or so, the increasing tendency for people to own a house for investment purposes, and to enter that investment very highly geared, it is possible that some households are now quite vulnerable. that vulnerability is also related to the effect that low inflation has nowadays on the funding side of the household balance sheet. in the days of high inflation, most new zealanders could rely on their nominal incomes also inflating quite rapidly. this meant that, even with the high nominal interest rates prevailing at the time, households that borrowed on debt - servicing terms at the limit of affordability

/ refit - - review - of - flexible - inflation - targeting / and https : / / www. regjeringen. no / en / aktuelt / report - of - the - law - commission - on - the - act - relating - to - norgesbank - and - the - monetary - system / id2558679 / page 5 of 11 “ strategies, tools and communication practices ” that service its dual mandate. 12 and, the bank of canada is well into a regular five - yearly review of its “ inflation control agreement ”. 13 14 beyond this, calls to build further resilience in the financial system – especially in its interface with the wider economy – is an emerging theme on the international agenda. 15 the first review of the reserve bank of new zealand act 1989 to be completed was that of monetary policy. now enacted in law, new zealand ’ s new monetary policy framework is being formally introduced on 1 april 2019. i will now elaborate on the specifics of the revised monetary policy framework with reference to its history, locating it in the wider context of other external policy reviews and consultation processes that the bank is involved in. reserve bank act 1989 : objectives & accountability the reserve bank act of 1989 was introduced at a time when there was great uncertainty about economic conditions in new zealand. in the 1970s and 80s, our country, like many others, had adopted a variety of strategies to deal with high and volatile inflation ; none were successful. the 1989 act gave the reserve bank operational independence to achieve the objective of price stability. a single decision maker model was introduced making the governor responsible and singularly accountable for the substance of monetary policy. the policy targets agreement ( pta ) between the minister of finance and the governor set explicit goals for monetary policy to pursue. 16 an agreement between a single decision maker and the government provided sufficient flexibility to make the appropriate revisions to the inflation target as we adjusted from high to low inflation. over time, there have been several revisions to the inflation target, settling in recent times on a band of 1 – 3 percent with a focus on the 2 percent midpoint. 17 12 federal reserve to review strategies, tools, and communication practices it uses to pursue its mandate of maximum employment and price stability, press release, 15 november 2018, ( https : / / www. federalreserve. gov / newsevents / pressreleases / monetary20181115a. htm ) wilkins, c., a.