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NZ Reserve Bank may be less of a 'fiefdom' with changes to policy-making, Treasury observer

Tuesday 27th March 2018

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Economists have generally welcomed proposed changes to the Reserve Bank's decision-making processes for monetary policy, including a Treasury observer at the policy committee, saying the bank may become less of a "fiefdom" as a result.

Incoming RBNZ governor Adrian Orr and Finance Minister Grant Robertson yesterday inked a new policy targets agreement that will now include employment in its policy targets, ending a sole focus on price stability. They also announced the results from the first phase of a review of the Reserve Bank Act, including the new Monetary Policy Committee structure.

At present, policy decisions are made by the governor alone. Under the new framework, Robertson said the committee would have five to seven voting members and would include a non-voting Treasury observer to help improve information flows between the Reserve Bank and the Treasury. It will mark the first time Treasury has been able to attend policy meetings at the independent Reserve Bank.  

Economist Shamubeel Eaqub said the changes will help increase transparency and communication at the bank, something that has been weak up until now. Given that the Treasury oversees the central bank within government it is “really strange” how removed they have been. “It makes sense for Treasury to have a bit of their nose stuck into the Reserve Bank as it has been a bit of a fiefdom,” he said.

Robertson told media that some members of the panel and the central bank did not favour the idea and there had been some “healthy” disagreement about the value of the role. He took pains, however, to emphasize that the position will not erode the central bank’s independence as “the operational independence of the Reserve Bank remains paramount.”

The central bank declined to comment on any pushback and at the media conference Orr said the move was “very healthy.” 

"The bank remains independent and if you have confidence in your independence you should be open and allow people to put their views on the table," Orr said. 

Former central bank governor Don Brash said he didn’t think it would make any “practical difference” and noted it is a throwback to an earlier era as there was a Treasury person on the central bank board when he first became governor in 1988, although that person was not involved in monetary policy.  Brash pioneered the existing Reserve Bank Act 1989 and was the first governor to put inflation targeting into effect. 

In a 2002 address titled 'Inflation targeting 14 years on', Brash said he was "very comfortable" with the prevailing definition of inflation targeting, taken from a 1999 book by economist and former Federal Reserve banker Ben Bernanke and others, that "low, stable inflation is monetary policy's primary long-run goal."

Four years later, in 2006, the then governor Alan Bollard noted in an address that the Reserve Bank Act "recognises the limitations of monetary policy in achieving multiple objectives, and specifies that the best possible contribution that monetary policy can make to the economy is achieving price stability."

But he also pointed out that "the assignment of authority and responsibility to an individual rather than a committee is uncommon amongst inflation-targeting central banks" and in reality it was policy by committee.

Robertson said the government hasn't set a specific numerical target for employment or the jobless rate, but wants to give maximum employment status alongside price stability as a primary goal. Employment is explicitly cited in both the US Federal Reserve's and the Reserve Bank of Australia's terms of engagement.

He says committees get better outcomes than individual decision-makers.

"Committee decision-making bodies for monetary policy are likely to deliver better quality decisions on average over time by harnessing a broad range of perspectives while guarding against the risk of extreme preferences," he said in yesterday's Q+A. "Committee decision-making for central banks is common practice internationally."

The changes will also shed more light on the bank's internal governing committee, the arrangements will be formalised in the new monetary policy committee announced yesterday, which installs three outsiders on what used to be mainly a group of bank officials.

ASB senior economist Mark Smith said other central banks have a very similar setup and the move will bring New Zealand in line with best practice overseas and “that’s hardly a bad thing.”

Robertson Monday also said, given the MPC will be collectively responsible for making monetary policy decisions, it would be inappropriate for the central bank governor to be the sole member of the MPC to agree the operational objectives for monetary policy.

“As a result, we are changing to a model where the Minister of Finance sets the operational objectives for monetary policy.”

Brash was sanguine about this move. “If the governor is no longer personally responsible for delivering any particular objective (because that is now the responsibility of the whole committee), it probably makes sense for the Minister of Finance to set out what he wants the bank to deliver.”

He underscored, however, it would be essential that any instructions to the bank are in writing and in public.

Officials will now advise the Minister of Finance on detailed implementation issues associated with the high-level Phase 1 decisions by late May. Robertson said he expects a bill will be introduced to parliament by mid-year.


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