1491803553291 - Political winds point to change for Reserve Bank model

Political winds point to change for Reserve Bank model

Adding employment to the Reserve Bank’s targets may be no more than a “cosmetic” change, economists warn.

On Monday Labour formally proposed adding a “commitment to full employment” to the Reserve Bank’s role of controlling inflation.

Labour’s finance spokesman Grant Robertson also proposed bringing in external appointments into a board which makes official cash rate (OCR) decisions, stripping the governor of the almost unique power over setting the benchmark rate.

Minutes of interest rate meetings would be published under Labour’s plans, bringing the Reserve Bank into line with many of its major peers.

READ MORE: * Reserve Bank governor’s unique power over interest rates to come under review * Labour to add full employment to Reserve Bank’s price stability mandate

It came two days after it was revealed that Finance Minister Steven Joyce had commissioned a review of the way the central bank makes interest rate decisions, to be undertaken by former State Services Commissioner Iain Rennie.

Joyce has already effectively ruled out external appointments, with Rennie considering only whether to formalise a practise of having senior officials of the bank assist the governor in a committee decision process.

Treasury has confirmed Rennie’s review will not accept public submissions and refused to release the terms of reference.

ANZ chief economist Cameron Bagrie said even under Labour’s proposals, the changes may have little practical difference in decision making.

“It’s obvious there’s going to be some changes, but I think where we’re headed there’s going to be some cosmetic surgery, and not much more than that,” Bagrie said.

When it comes to monetary policy, the Reserve Bank has one tool, the OCR, and one target, inflation.

Bagrie said giving the central bank a target of full employment was not uncommon around the world, but was impossible to execute.

“When you’ve got one instrument, you can target one thing. We can talk about giving them a dual mandate, but when push comes to shove, the inflation target will end up dominating.

“It is mathematically impossible to target two variables with one instrument.” 

ASB chief economist Nick Tuffley said the experience across the Tasman, where the Reserve Bank of Australia (RBA) has employment and inflation targets, was that employment tended to be overlooked.

“It’s pretty clear from the way they [the RBA] behave that what they’re focused on is inflation outcomes.”

There were times in the economic cycle when controlling inflation may send interest rates in the opposite direction to the aim of maintaining full employment.

“You end up having your stated aims opposing each other.”

Tuffley said it was “timely” to reconsider whether New Zealand’s single decision maker model – introduced when the Reserve Bank was a world pioneer of inflation targeting – was still appropriate.

However the board was made up, the market would pay close attention to how its member’s voted, Tuffley said, with central banks around the world publishing meeting minutes and voting records.

“There would be a lot of interest in how people voted.”

While Reserve Bank governor Graeme Wheeler has publicly stated that his advice for a surprise interest rate cut in 2016 was unanimous, the bank has refused to release any records of votes on earlier OCR decisions.

ANZ’s Bagrie said it was not clear that making minute meetings public would provide the kind of disclosure that the market might hope for.

“From a transparency perspective it would be great to have some board minutes. The risk of that is you force a lot of the real conversations [out of the boardroom and] into the corridor.”


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