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RBNZ independence at risk from policy committee appointment process - ASB

Thursday 20th September 2018

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Allowing the minister of finance to appoint all the members of the Reserve Bank’s monetary policy committee risks weakening perceptions of the bank’s operational independence, ASB chief economist Nick Tuffley says.

Confidence in the central bank’s independence is important and would be reinforced by leaving internal appointments to the new committee in the hands of the bank, Tuffley told MPs yesterday. Limiting those internal appointments to the committee to only two terms also appears unnecessarily restrictive and may reduce the flexibility the bank has to manage staff progression and retention.

“Particularly when you are only going to have one deputy governor going forward, you are starting to put a lot of limitations and restrictions on the talent pool and the depth within the Reserve Bank," Tuffley told Parliament’s finance and expenditure select committee.  

That could also raise “some potential issues around both flexibility of managing internal talent, but also that ‘flight risk’ in the sense that you may be losing talent and institutional memory as well.”

The committee is considering changes to the Reserve Bank Act that will remove sole interest rate decision-making from the governor and vest it in a five- to seven-member committee.

The proposed legislation would also replace the policy targets agreement negotiated between the minister of finance and the governor with a ministerial remit to the monetary policy committee. The bank would advise the minister on the remit.

The bill would also require the bank to look at ways to support maximum sustainable employment alongside its current objective to maintain general price stability over the medium-term.

The new policy committee will comprise at least five members, including the governor and deputy governor and one or two bank staff. They will be appointed by the minister on the advice of the bank’s board.

Tuffley spent three years at the Reserve Bank in the 1990s. He said the proposal that the deputy governor should also be appointed by the minister, also on the advice of the bank’s board, increases the risk of political influence at the bank or the perception of it.

Responding to a question from National MP Amy Adams, he said the value of the internal appointees on the committee is the depth of experience they bring. If there is a risk of ‘group think’ that would be balanced by the broader experience the external members of the committee would provide, he said.

And he noted that while it would be unlikely for members to serve more than two five-year terms, restricting membership to two terms is unnecessary and could risk "hollowing out” the succession pool within the bank.

He noted that the bank’s current assistant governor and head of economics has served in that role for 11 years. In that position he would have advised the governor closely on his monetary policy deliberations.

Tuffley also said he prefers the current negotiated policy targets agreement over the proposed ministerial remit.

The bilateral PTA is a good compromise that allows political input from the government of the day on what should be achieved, alongside more “pragmatic” expertise from the bank on what is feasible.

Other submitters yesterday included social worker Steve O’Connor and publisher Martin Taylor.

Taylor argued the bank’s targets should specifically include housing inflation, given the damage the bank’s provision of cheap credit had done to the economy by fuelling excess house prices.

O’Connor asked the committee to consider adding a broad social responsibility requirement to the bank’s targets, including a full employment target.

Tuffley and BusinessNZ economist John Pask said that if the bank’s targets are to include an employment measure, it should be made secondary to the central objective of price stability.

Tuffley said the bank has a lot more flexibility than it did almost 30 years ago when the current act was put in place.

But he said the lack of guidance in the proposed legislation as to how to treat the dual objectives could be challenging depending on where in the economic cycle the country sits.

If monetary policy is run too loose, to support employment coming out of a slowdown, there is a risk that inflation could get away, he said. And he noted there are genuine costs to the economy if the bank has to “rein in” inflation longer term.

“You may find the inflation goal starts to get more uncomfortable.”


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