By lowering tradables inflation, it also increased the risk that headline inflation would remain low and feed through into falling long-term inflation expectations. Lower long term interest rates reduced the funding costs for New Zealand banks and led to historically low mortgage rates.
For the pursuit of price stability, money supply targets were the first object of attention, but when they proved unsatisfactory, an increasing number of central banks resorted to the “constrained discretion” of inflation targeting. As far as financial system stability was concerned, the answer was found in intensified prudential supervision. This followed several damaging crises that occurred in the wake of financial liberalisation.