Reining in the Reserve Bank Governor
By Richard Harman (author)
The Government is looking at moving the Reserve Bank a little closer in the way it operates to its Australian counterpart – and towards a position likely to be advocated by Labour.
It is also a proposal that Treasury believes could act as insurance against a future Governor having “poor judgement”.
For the first time since the current Act was passed in 1988, a National Government is questioning the Bank.
The new Finance Minister, Steven Joyce, has asked Treasury for its views on how the Bank carries out its mandate.
Specifically, Joyce has asked whether the next Governor should have sole responsibility for setting the Official Cash Rate or whether the Bank’s Monetary Policy Committee should have its role in the process formalised.
Labour’s Finance Spokesman Grant Robertson has been toying with the role of the committee and is expected to make a major speech today outlining his views.
It is likely he will call for a more formal role for the Committee and possibly might even advocate outsiders being appointed to it.
Joyce’s request looks like more than a normal Finance Minister to Treasury query because Treasury has called in former State Servicers' Commission Chair, Iain Rennie, as a consultant to help answer his query.
Rennie was economic advisor to Prime Minister Jim Bolger during his Government’s first term from 1990 – 93 when the Reserve Bank Act was bedding in.
And Treasury itself has previously advocated formalising the committee’s powers to act as a check on the Governor.
Last night Joyce told POLITIK that he was interested in whether the Bank should formalise the Committee.
The Committee is a group of senior Bank officials that meets weekly to advise the Governor on issues relating to the formulation and implementation of monetary policy.
Currently, it has no basis in legislation, and is expressly not a decision-making committee.
Committee members do not vote and minutes are not published.
The Bank says that the intent of Committee discussions is to ensure that the Governor is exposed in a systematic way to alternative views and a broad sweep of opinion throughout the policy assessment process.
But Joyce’s query opens up whether or not the Committee should have decision-making powers and whether its minutes should be made public.
The Australian Reserve Bank’s Monetary Policy Committee meets only monthly but publishes its minutes two weeks after every meeting.
In 2001 then Finance Minister Michael Cullen commissioned an "Independent Review of the Operation of Monetary Policy” by Professor Lars Svensson.who recommended an Australian-style approach, but Cullen rejected the proposal.
“I favour retaining the Governor's sole responsibility for monetary policy," he said.
But he also said: " I believe there may be some benefits to the decision-making process by exposing the Governor to a wider range of views when decisions are made.”
That really didn’t happen except that the Bank conducts a regular programme of meetings with businesses round the country and names those businesses in its Monetary Policy Statements.
Robertson, however, goes further than Cullen regarding the way the bank operates.
He wants it to target employment along with inflation.
“We're going to be asking them to also think about how we get more New Zealanders into work, how do we make sure that we bring that unemployment rate down?” he said on TVOne’s “Q+A” yesterday.
NZ Firs’s position, on the other hand, is ambiguous.
In a debate in Parliament in 2015, the party’s Financial Spokesperson, Fletcher Taubuteau said “the Governor of the Reserve Bank has turned into some kind of monetary policy demigod. In other countries, such power is not concentrated as it is here in New Zealand.”
But he then specifically ruled out moderating the Governor’s power by a committee.
Instead NZ First has tended to focus on the Policy Targets' Agreement, and they go further than Labour and want it to include factors such as the rate of growth, export growth, the value of the dollar, and employment as well as price stability in setting the Official Cash Rate.
This condition has been widely expected to be a bottom line for NZ First in any post-election talks they might be involved in to form a Government.
“I don’t have any sympathy for changing the targets,” Joyce told POLITIK.
“If you do the inflation targeting right then you will maximise employment over the medium to longer term.
"The Reserve Bank did a good job through the Great Financial Crisis, and they've contributed to the New Zealand economy being a very strong performer.”
Referring to the NZ First position, Joyce said the Government didn't do negotiations five and half months out from an election.
“I’ve lost count of how many bottom lines Mr Peters has.
“We’re not even going to go there.
“We’re pretty happy with the Reserve Bank performance overall.
"Everybody can have quibbles around the edges, but the Bank has served New Zealand well.”
Joyce has however previously expressed interest in changing the sole powers of the Governor.
Asked by Greens List MP Julie-Anne Genter, in 2015, on a day when he was acting Finance Minister, if he thought that a panel of experts from across the economy, instead of only one Reserve Bank Governor, might make better decisions around monetary policy he replied:
"The suggestion that the member makes, of having a panel of people making the decision, is, I have to say, not the silliest suggestion in monetary policy we have heard from the Greens."
But he went on to in effect argue against Genter’s proposition.
“Yes, you could have a change at some point, but, again, I think that if you wanted to do it, and it is not a proposal that we are at all considering at this point, but if it was something that you wanted to do, you would have to do it for the right reasons.”
In a 2012 memo to then-Finance Minister Bill English Treasury said in principle there were potential benefits in a committee model.
“Internationally it is usual to have a committee approach, with a range of possible committee structures.
“In New Zealand, the role of the Reserve Bank has broadened since the Act was put in place in 1989, and this may increase the range of skills required by a future Governor.
“In addition, the current single-decision-maker approach poses risks, such as a greater risk of poor judgement by a future Governor than with a committee.
“This risk may be greater for New Zealand than for larger economies given the smaller pool of monetary expertise to draw on to find one person to fulfil all the roles of the Governor."
The current Governor, Graeme Wheeler, finishes up on September 26 and there will be an acting Governor for the following six months while a new Governior is appointed.
Joyce judges that this is therefore an oppurtune time to look at making any changes to the Reserve Bank Act - before the next Governor is appointed.