Acting RBNZ Governor Grant Spencer concerned about plans to include 'externals' on the proposed new RBNZ monetary policy committee; says the committee needs 'collective responsibility' rather than being 'individualistic'

By David Hargreaves

The Reserve Bank's worried that inclusion of external advisors on the proposed new monetary policy committee might turn the committee into a "circus".

In releasing the terms of reference for the Government's proposed review of the Reserve Bank Act this week, Finance Minister Grant Robertson reiterated the plans for creation of a formalised monetary policy committee. At the moment decisions on interest rates are officially the sole domain of the Governor of the bank - though in reality the bank has been operating its own internal committee to make these decisions.

The current internal policy making Governing Committee currently comprises: Acting Governor Grant Spencer, Deputy Governor Geoff Bascand, and Assistant Governor John McDermott.

Robertson said the recommendations in phase one of the review of the Act would provide for the inclusion of external experts on the decision-making committee for monetary policy.

"I am more than comfortable that there are capable people with the expertise required in academia, the public, private and non-governmental sectors, including former Board members, to undertake this work. We would be seeking to have a range of perspectives represented reflective of both the importance of the decisions the Bank makes, and indeed the broadened objective we have proposed," he said.

However, asked about this at the media conference after the release of the RBNZ's latest Monetary Policy Statement on Thursday, Acting RBNZ Governor Spencer said, while the bank agreed that the Act should be changed to accommodate a committee, "because we already operate with a committee", on the issue of "externals" sitting on the committee "there are pluses and minuses and quite a few different views and we'll have to work through this in the upcoming review".

"Clearly, the benefit is more diversity in the decision making but there's potential issues we think in a small country, finding the appropriate expertise that's not conflicted, that's politically independent etc - making it work is the tricky issue.

"We see a more important issue as trying to make sure that the committee has a collective responsibility rather than having an individualistic committee.

'A bit of a circus'

"Sometimes you see policy committees around the world in other central banks where everyone's out with different views in public and it turns into a bit of a circus. 

"And that's a thing that really, we are more concerned in avoiding that.

"Sure - get diversity and different views, publish minutes whatever, but have collective responsibility rather than everyone heading in different directions," Spencer said.

He said the RBNZ would have to work through with Treasury in the review to get a "framework that makes sense".

"We think the current internal committee works pretty well - and so if it is going to be changed, we want that to improve it, not worsen it - so that would be the challenge," Spencer said.

 "If you have externals...and, every week you see the external members and internal members are giving speeches. So there's running commentary and a focus of the media in the financial media on the different views and where it is coming out for monetary policy. 

"It brings additional focus on monetary policy - which we think, you know, monetary policy gets a lot of coverage already - but monetary policy is not the only game in town. There's a lot of other important policies that are relevant to the economy and if you have a lot of...a diverse range of people on the committee who are all giving different views and bringing the focus of your attention more on to monetary policy...I'm not sure that's a very productive way to go. 

'Undermines the reputation and credibility'

"It also potentially undermines the sort of reputation and the credibility of the institution. It's a risk, I'm saying. That's a risk."

Deputy Governor Bascand, who is seen as a potential candidate to be the next Governor, added: "The concern is that the issues that we set out in the Monetary Policy Statement are the focus of the discussion - the range of uncertainties and risks that we spend a lot effort trying to articulate as opposed to getting a difference of view between individuals.

"That seems not to be the key point. And you can get personality dimensions where the individuals are more the focus - are they are dove or are they a hawk or whatever else - as opposed to what are the issues that the bank was considering in terms of risks around how household spending is going and the labour market issues we've been talking about and I think that's what Grant [Spencer] is alluding to here, which is that we would rather have that focus on the substance of it."  

Spencer then continued:

"It's like Cabinet operates with collective responsibility. They have different views and they have a big scrap inside the Cabinet but then outside it's a unified story. It's a collective responsibility. 

"We just think it should be a similar approach for the Monetary Policy Committee." 

Asked if there was the potential for more volatility in financial markets with the proposed new committee, Spencer said:

"Well, if you moved away...if it was individualistic and everyone was giving different views there would certainly be the risk of that, yeah."

Moving to a dual mandate

One of the other major developments in the upcoming review of the Reserve Bank is the proposal to include employment as part of the price stability objective for the RBNZ.

Spencer was asked what difference he thought this might make to the operation of monetary policy.

"It's pretty early days because the review's just starting and so we don't actually have a change in our mandate as yet, but I would say and I think this view is shared by my colleagues that moving to a dual mandate is unlikely to have a  major impact on the way that we run monetary policy.

"Currently our approach - we call flexible inflation targeting -  so inflation is our primary objective but it is not the sole objective and we do look closely at the real economy and a whole range of economic variables.

"And so, for example, sometimes we are happy to see inflation move outside of our target band in order to promote stability in output, employment and the exchange rate, and this is a requirement in our Policy Targets Agreement.

"So, that's called flexible inflation targeting. We do allow and try and stabilise the broader economy - not just prices.

"With a dual mandate it may be that our approach becomes more flexible - more flexible in the sense of allowing greater volatility in inflation in order to promote more stability in employment, for example.

"So, to that extent, there's trade-offs and there may well be situations where a new mandate, a dual mandate, would shift our approach - particularly in situations where the employment, the labour market was a long way from equilibrium. 

"But in the current situation I would say that the labour market is pretty balanced and therefore I don't think a dual mandate, if we had it right now, would make much difference at all to our current policy stance."

Appointment of new Governor

As things stand, Spencer is set to be the Acting Governor up till retiring on March 26 - and he confirmed when asked that he was still expecting to go on that date, with the plan being for a new Governor to be announced well before then.

"I'm not sure how soon, but the process is well in train. I would certainly expect the announcement to be made well ahead of next March - whether it is ahead of Christmas, I'm not sure."