Robertson seeks steady as she goes course for monetary policy reform

Tuesday 7th November 2017

Finance Minister Grant Robertson has used his first press conference since taking office to signal to financial markets that the new government remains committed to predictable monetary policy.

Robertson held a formal ceremony with acting Reserve Bank of New Zealand governor Grant Spencer to sign afresh the existing Policy Targets Agreement that puts inflation targeting at the heart of monetary policy until a review and new legislation to alter that focus is completed next year.

The move comes ahead of Thursday’s Monetary Policy Statement, the first full review of the state of the economy and inflationary pressure since before the Sept. 23 election and the Sept. 30 retirement of the previous RBNZ governor, Graeme Wheeler.

Robertson announced the government would shortly announce an independent expert review panel to study the current monetary and financial stability practices of the RBNZ in a two-phase process that will first insert an employment focus into the PTA and implement monetary policy decision-making by committee rather than vesting that responsibility in the governor alone.

Robertson faced repeated questioning at a media conference as to whether the inclusion of an employment target could be expected to lead to lower interest rates, but acknowledged that current low unemployment, high workforce participation and emerging signs of higher inflation could have the opposite effect.

“There are many, many different scenarios that could occur,” said Robertson, who has previously criticised the RBNZ for raising interest rates prematurely in mid-2014, when the official cash rate was raised to 3.5 percent.

In June 2015, that decision was reversed and the OCR, which governs bank borrowing and lending rates, began a long slide to 1.75 percent in November last year, where it has remained ever since as wage and other inflationary pressures have remained subdued despite robust economic growth rates.

The expert group has yet to be appointed, although that will happen soon, and Robertson said he had yet to see the review of the RBNZ undertaken by former State Services Commissioner Iain Rennie, which was ordered by the previous government and is understood to have been completed some months ago.

Robertson also confirmed he had spoken to the current RBNZ chair, Neil Quigley, to confirm he would seek a new governor – due for appointment by March 31 next year – willing to implement Labour’s dual objective monetary policy framework.

The first phase of the review process would also review “whether changes are required to the role of the Reserve Bank board as a consequence of alterations to the decision-making model”.

In the second review phase, “the Reserve Bank and the Treasury will jointly produce a list of areas where further investigations of the Reserve Bank’s activities are desirable”.

It appears this could include how the central bank seeks to ensure stability in the New Zealand financial system.

Robertson reaffirmed the importance of the RBNZ continuing to have operational independence and said the Treasury would lead the official work on reviewing the central bank’s activities.

(BusinessDesk)

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