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Could Wheeler be last RBNZ governor to call the shots alone?

Friday 10th February 2017

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Departing Reserve Bank governor Graeme Wheeler could be the last to have sole decision-making authority on monetary policy as opposition MPs call for a move to a board decision model such as Australia uses and seek an expansion to the policy targets agreement, say economists at UBS.

Wheeler will depart when his term ends on Sept. 26 and his deputy, Grant Spencer, has been named as acting governor once he leaves. Labour's finance spokesman Grant Robertson has been calling for an expansion of the policy targets agreement between the governor and the finance minister to include economic drivers such as housing and employment. The PTA between Wheeler and former Finance Minister Bill English in 2012 has a sole focus on price stability, having ditched a reference to achieving full employment when English won the post in 2008. 

"What I'm signalling is that the single price stability objective is worth a rethink," Robertson told BusinessDesk. "Certainly we would not do away with a price stability objective."  

Labour has also indicated it would prefer the RBNZ's mandate to be more akin to the Reserve Bank of Australia, where monetary policy decisions are made by its full board and its charter includes "the maintenance of full employment".

The Green Party finance spokesman James Shaw has been critical of the central bank's inflation targeting record and in July 2015 said the current governance structure "relies too heavily on the judgement of one person to set interest rates - the Reserve Bank governor", but English had refused to heed a Treasury recommendation that the single decision-maker feature be reviewed. 

NZ First leader Winston Peters has previously sought to widen the RBNZ's mandate to take more account of the kiwi dollar although his member's bill in 2012 to that effect was defeated.

Minister of Finance Steven Joyce "has indicated that he did not foresee significant changes to existing arrangements with the RBNZ, but opposition parties have flagged plans to reform the RBNZ," UBS economists led by Robin Clements said in their weekly New Zealand economic perspectives report. "Either way, there is a distinct possibility that a shift from the current single decision-maker set-up to a RBA-like board decision-making model could be considered."

Joyce, who is also a veteran of National Party election campaigns, has already shown a more forthright tone than his predecessor English. This week he kicked for touch talk of a possible new macro-prudential tool for the RBNZ, debt-to-income (DTI) limits.

“The bank has a number of regulatory tools available to it to address systemic risks it identifies and I am cautious about adding further tools," Joyce said, in announcing that the RBNZ will do a full cost-benefit analysis before any decision is made on the potential use of the macro-prudential tool.

In response, Wheeler said at a media conference this week: "If you say what our preferred position would be, we have this already in the toolkit, that would be our preferred position so we could respond in that situation. But the government has been clear it wants a consultation on that. We would normally consult when we were about to introduce it, but it’s asked for it up front and we’re happy to do that work".

Bank of New Zealand currency strategist Jason Wong wrote in a note this week that Joyce "clearly has no interest in this sort of intrusion on lending in the current election year, telling the RBNZ to provide some comprehensive cost-benefit analysis and a public consultation".

UBS's Clements said the effect of having Spencer in a caretaker role "is to essentially maintain the status quo on monetary policy until at least the end of March next year, i.e., the same Policy Targets Agreement (PTA) and, with the exception of Graeme Wheeler, same personnel and decision-making processes."

The PTA has evolved into a more flexible agreement over the years, which has allowed for smoother policy rate-setting and for the use of macro-prudential tools, Clements says in the report. "It is a mark of Wheeler's term as governor that macro-prudential tools and FX intervention were utilised".

But with a new governor required, a new finance minister and a general election, there is the possibility of change, including an "RBA-like board" that could involve "government-appointed members (representing various sectors of society), with decisions made by consensus".

At the margin, there is a risk that such a board could tend "to favour growth over inflation", he said. "It is not clear such a change would be more growth-positive (though this would be a risk) and so we would not expect a material difference to observed market outcomes."

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