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NZ Reserve Bank to make policy by committee, adds employment to inflation mandate

Monday 26th March 2018

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Changes to the Reserve Bank's policy targets agreement, a shift to decision-making by committee and a new governor in Adrian Orr are unlikely to herald a change in the interest rate outlook, economists say.

The central bank will now include employment in its policy targets, ending a sole focus on price stability, and the bank will move to policy by committee instead of leaving interest rate decisions to the governor in changes outlined as Finance Minister Grant Robertson and governor-designate Adrian Orr signed a new policy targets agreement.

The new PTA reiterates the goal of keeping annual CPI inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point of 2 percent. But along with a goal of maintaining price stability, the central bank will have a goal of "supporting maximum sustainable employment within the economy," the new PTA says.

At a media briefing today, when asked if employment was already at a sustainable level Orr said he was "very, very pleased with the economic state of New Zealand over recent years."

Unlike the inflation target, there will be no hard number on employment. Both Orr and Robertson emphasised the employment goal is dynamic and broad and impacted by many variables. However, the central bank will be required to consider employment outcomes when formulating policy and to outline how it does that in the monetary policy statement. 

ANZ Bank New Zealand chief economist Sharon Zollner said the new PTA is "similar in spirit to its predecessor and we don’t think it will alter the conduct of policy much." She said modern monetary policy is about smoothing the business cycle within the context of an ultimate medium-term inflation target, and this has not changed. "In practice, smoothing the business cycle and ‘contributing to maximum sustainable employment’ amount to the same thing," said Zollner. 

Westpac Banking Corp New Zealand chief economist Dominick Stephens said today's announcements "were very much in line with expectations – the RBNZ is not about to radically change its behaviour."

Orr said the Reserve Bank’s flexible inflation targeting regime "has long included employment and output variability in its deliberations on interest rate decisions."

"What this PTA does is make it an explicit expectation that the bank accounts for that consideration transparently,'" he said in the joint statement with Robertson.

Orr's comments may support the view that the central bank won't alter its current stance of keeping rates on hold at a record low 1.75 percent for the foreseeable future. When asked if he thought the central bank might now be more successful at hitting the 2 percent inflation target he said "I will be pleased if we can keep inflation as low and stable as the bank has done over the past decade or so... one hopes we will be close to the midpoint and that's exactly where the bank has been over the past decade."

The announcement also includes the first phase of a review of the Reserve Bank Act including a new monetary policy committee (MPC) for decision making. At present, policy decisions are the final call of the governor alone although in practice the bank's internal governing committee has made decisions on monetary policy.

Robertson said the government has agreed to a range of five to seven voting members and "it is my intention that the first committee of seven members would have four internal and three external members," he said. The external members will not be representing specific sectors on the board but will be chosen based on merit, said Robertson. He said he was more than confident it will be possible to find people with the necessary expertise. 

Members will be appointed by the Minister of Finance on the recommendation of the Board for four-year terms. This will be a voting committee and both the minutes and the votes will be made public, but will not be attributed to specific members.   

Zollner said the changes are "in line with accepted international best practice" and the single decision-maker model was "an outdated legacy from the early days of inflation targeting where accountability was seen as crucial to build credibility."

While a committee will be established, the governor will remain the sole spokesperson on monetary policy, unlike other jurisdictions where different board members frequently comment.  Stephens said this was a positive as "New Zealand will also eschew the conflicting speeches that have dogged the Bank of England and the Federal Reserve – only the Governor will speak on behalf of the committee." 

Also, the committee will include a Treasury official who will act as an observer, something Robertson said not everyone agreed with. Orr said, however, he is a firm believer in an open and transparent decision-making environment and the fact that the Treasury observer is there as an observer is "very healthy." According to Orr, "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." 

Robertson said a bill will be introduced to Parliament in the coming months to implement the Cabinet’s decisions on recommendations from Phase 1 of the review. "As well as legislating for the dual mandate, this will include the creation of a committee for monetary policy decisions," he said.

"While the single focus on price stability has generally served New Zealand well, there have been significant changes to the New Zealand economy and to monetary policy practices since it was enacted," Robertson said.

Phase 2 of the review of the RBNZ Act "is being scoped. It will focus on the Reserve Bank’s financial stability role and broader governance reform. Announcements on the final scope will be made by mid-2018 and subsequent policy work will commence in the second half of 2018."


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