An economist says the new Policy Targets Agreement between the Reserve Bank and the Government has introduced significant changes to the way inflation is managed.
The agreement maintains the requirement to keep inflation between 1% to 3% on average in the medium term, but the Reserve Bank now has to focus on keeping future average inflation near 2%.
Westpac chief economist Dominick Stephens says the agreement has tightened up on the definition of inflation.
He says it is quite significant, because it effectively reduces the "speed limit" for inflation from 3% to 2%.
Mr Stephens says it could mean slightly higher interest rates in the short-term - particularly if the Canterbury rebuild provokes inflation.
"But over the longer run and over economic cycles, it'll mean lower average interest rates and lower average inflation - which I think is a positive step for New Zealand".
The Reserve Bank is now also required to monitor asset prices.
Mr Stephens says this gives the central bank a mandate to increase interest rates if there was a boom in house prices or to reduce interest rates if housing prices went into free-fall.
He says the new agreement is a positive set of changes.
