Finance Minister Grant Robertson and incoming RBNZ Governor Adrian Orr have signed a new Policy Targets Agreement; new committee to be formed for setting interest rates

Finance Minister Grant Robertson and incoming RBNZ Governor Adrian Orr have signed a new Policy Targets Agreement; new committee to be formed for setting interest rates

By David Hargreaves and Jason Walls

The Reserve Bank must now target "maximum levels of sustainable employment" as part of its management of monetary policy.

It has also been revealed that as part of "Phase 1" of a review of the Reserve Bank Act announced by the Government last November, the previously sole mandate for setting interest rates that rested with the RBNZ Governor will be replaced by a committee. 

Both the inclusion of the employment target and the change to the way the Official Cash Rate is set (IE now through a committee) had been widely signposted.

The Government has agreed a range of five to seven voting members for the new Monetary Policy Committee (MPC) for decision-making. 

Minister to appoint 'externals'

“It is my intention that the first committee of seven members would have four internal, and three external members. Treasury will also have a non-voting observer on the MPC to provide information on fiscal policy,” Finance Minister Grant Robertson said.

The Minister of Finance will be responsible for the external appointments, while the internal members include will include the Governor, who will chair the committee, and the deputy Governor.

The other members will be nominated by the board after consultation with the Governor who will be the sole spokesperson on the committee’s decisions.

Minutes of the MPC meetings will be available, but the balance of votes will be published without attribution.

The MPC is expected to begin operation in 2019 following passage of amending legislation. There will be a full Select Committee process for the legislation.

Concerns alleviated

The RBNZ has previously expressed concerns about the inclusion of outside people or "externals" on the new committee - but will have had its concerns probably somewhat alleviated by the fact that these 'externals' will be a minority.

Robertson and incoming Reserve Bank Governor Adrian Orr have put their signatures to a new Policy Targets Agreement on Monday that, as expected, contained for the first time a reference to targeting employment. The PTA can be read here.

Specifically, the new part of the PTA reads: "The conduct of monetary policy will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy."

Otherwise the targets remained the same - a target for inflation of between 1% and 3% with a focus on achieving a 2% rate as the midpoint.

The PTA is an agreement between the Finance Minister and RBNZ Governor that basically sets out the parameters of monetary policy. Since introduction of the Reserve Bank of New Zealand Act 1989 the primary function of the Reserve Bank has been to deliver "stability in the general level of prices." Section 9 of the Act then says that the Minister of Finance and the Governor of the Reserve Bank shall together have a separate agreement setting out specific targets for achieving and maintaining price stability. This is known as the Policy Targets Agreement (PTA).

Thanked Spencer

At a press conference on Monday Robertson thanked outgoing Acting Governor Grant Spencer for his years of service to the central bank – “he has served the bank extremely well and on a personal level, I’m very grateful for what he has done over the period of his term as Acting Governor.”

Robertson said it was important the role monetary policy plays as a tool to support the real, productive economy and the effect it can have on employment outcomes was recognised.

On the inclusion of external, expert, members on the Monetary Policy Committee, Robertson said this would help ensure a "diversity of perspectives is harness in the decision making".

'Significant discussion' over Treasury official presence

He did say that the presence of the Treasury official "was the subject of significant discussion during the first phase of the review".

"I was to assure people that the Treasury observer will be just that – an observer; they will not be part of the decision-making process."

New RBNZ Governor Orr said the PTA "recognises the importance of Monetary Policy for the wellbeing of all New Zealanders".

'A means not an end'

Low inflation, was, he said a "means, not an ends in itself to economic wellbeing".

The Reserve Bank’s flexible inflation targeting had always recognised and taken on board concerns about employment.

"What the [new] PTA does is make the employment side far more transparent and the Reserve Bank will be obliged to talk openly and transparently about how its short-term considerations have been taken into the decision-making framework when setting interest rates." 

The trade-off

One of the concerns, as outlined by the likes of former Reserve Bank Governor Don Brash, is the trade-off between targeting employment and inflation with the official cash rate.

Brash told RNZ: "If there was a serious divergence with unemployment going up, and inflation going up quite strongly as well, the Reserve Bank would be a situation of having to choose between following one objective or the other; that's where life would get tricky for them."

When asked about this, Orr said it was "always going to be conditional on the issues".

In general times, it would not make much difference as the bank was always considering short-term volatility in both inflation and employment when considering interest rates, Orr said.

'Economic shocks and extreme business cycles'

"But there can be times, such as in an economic shock or an extreme business cycle where you have to really trade-off short-term inflation versus employment."

One extreme, Orr said, was stagflation – in which inflation and unemployment were rising at the same time.

But Orr said on the other end of the spectrum, during negative economic shocks, monetary policy had shown an enormous ability to stabilise economies globally – for example through the Global Financial Crisis.

Robertson said other central banks with the same mandate have been making these decisions on the basis outlined by Orr.

What is ‘maximum sustainable employment’?

Orr said "maximum, sustainable employment" would be determined by a "very wide range of economic factors", beyond just monetary policy.

"It is not monetary policy alone that will determine what is the maximum, suitable level of employment, but we need to be cognisant of the level of employment on future inflation, and also our role in stabilisation when needed."

Robertson said the Government’s unemployment target was 4% but it recognised there were a "number of factors and policies that influence that".

It was up to the Reserve Bank to report back to the Finance Minister on what it considered to be "maximum sustainable employment" and what considerations it was putting in place to measure this.

"We’re not asking the bank to come up with a specific target within the way they determine what maximum, sustainable employment is," Robertson said.

More details on this will be published in the RBNZ's next Monetary Policy Statement.      

'A dynamic and broad concept'

Orr said maximum, sustainable employment was “a dynamic and a broad concept.”

He said there were many areas outside Monetary Policy that the Reserve Bank would need to consider.

“It’s dynamic in the sense that there is not only demand considerations for work, both domestic and international, but there are also a lot of supply considerations around willingness and capability and skill levels to work.”

Through time, Orr said, maximum sustainable employment would be a dynamic statistic which is why there is no target.

Asked if New Zealand was at the maximum sustainable level at the moment, Orr said: "we’re running a very, very healthy economy at the moment."

This was the statement released on Monday:

Finance Minister Grant Robertson and incoming Reserve Bank Governor Adrian Orr today signed a new Policy Targets Agreement (PTA) setting out specific targets for maintaining price stability and a requirement for employment outcomes to be considered in the conduct of monetary policy.

The new PTA takes effect from 27 March 2018, when Adrian Orr starts his five-year term as Governor. The new PTA has to be signed under the existing provisions of the Reserve Bank Act 1989, which has price stability as the Reserve Bank’s primary objective.

The agreement continues the requirement for the Reserve Bank to keep future annual CPI inflation between 1 and 3 percent over the medium-term, with a focus on keeping future inflation near the 2 percent mid-point.

The new PTA now also requires monetary policy to be conducted so that it contributes to supporting maximum levels of sustainable employment within the economy.

The new focus on employment outcomes is an outcome of Phase 1 of the Review of the Reserve Bank Act 1989, which the Coalition Government announced in November 2017.

“The Reserve Bank Act is nearly 30 years old. While the single focus on price stability has generally served New Zealand well, there have been significant changes to the New Zealand economy and to monetary policy practices since it was enacted,” Grant Robertson said.

“The importance of monetary policy as a tool to support the real, productive, economy has been evolving and will be recognised in New Zealand law by adding employment outcomes alongside price stability as a dual mandate for the Reserve Bank, as seen in countries like the United States, Australia and Norway

“Work on legislation to codify a dual mandate is underway. In the meantime, the new PTA will ensure the conduct of monetary policy in maintaining price stability will also contribute to employment outcomes.”

A Bill will be introduced to Parliament in the coming months to implement Cabinet’s decisions on recommendations from Phase 1 of the Review. As well as legislating for the dual mandate, this will include the creation of a committee for monetary policy decisions.

“Currently, the Governor of the Reserve Bank has sole authority for monetary policy decisions under the Act. While clear institutional accountability was important for establishing the credibility of the inflation-targeting system when the Act was introduced, there has been greater recognition in recent decades of the benefits of committee decision-making structures,” Grant Robertson said.

“In practice, the Reserve Bank’s decision-making practices for monetary policy have adapted to reflect this, with an internal Governing Committee collectively making decisions on monetary policy. However, the Act has not been updated accordingly.”

The Government has agreed a range of five to seven voting members for a Monetary Policy Committee (MPC) for decision-making. The majority of members will be Reserve Bank internal staff, and a minority will be external members. The Reserve Bank Governor will be the chair.

“It is my intention that the first committee of seven members would have four internal, and three external members. Treasury will also have a non-voting observer on the MPC to provide information on fiscal policy,” Grant Robertson said.

The MPC is expected to begin operation in 2019 following passage of amending legislation. There will be a full Select Committee process for the legislation.

Reserve Bank Governor-Designate, Adrian Orr, said that the PTA recognises the importance of monetary policy to the wellbeing of all New Zealanders.

“The PTA appropriately retains the Reserve Bank’s focus on a price stability objective. The Bank’s annual consumer price inflation target remains at 1 to 3 percent, with the ongoing focus on the mid-point of 2 percent.

“Price stability offers enduring benefits for New Zealanders’ living standards, especially for those on low and fixed incomes. It guards against the erosion of the value of our money and savings, and the misallocation of investment.”

Mr Orr said that the PTA also recognises the role of monetary policy in contributing to supporting maximum sustainable employment, as will be captured formally in an amendment Bill in coming months.

“This PTA provides a bridge in that direction under the constraints of the current Act. The Reserve Bank’s flexible inflation targeting regime has long included employment and output variability in its deliberations on interest rate decisions. What this PTA does is make it an explicit expectation that the Bank accounts for that consideration transparently. Maximum sustainable employment is determined by a wide range of economic factors beyond monetary policy.”

Mr Orr said that he welcomes the intention to use a monetary policy committee decision-making group, including both Bank staff and a minority of external members.

“Legislating for this committee will give a strong basis for the Bank’s use of a committee decision-making process. Widening the committee to include external members also brings the benefit of diversity and challenge in our thinking, while enhancing the transparency of decision-making and flow of information.”

Phase 2 of the Review is being scoped. It will focus on the Reserve Bank’s financial stability role and broader governance reform. Announcements on the final scope will be made by mid-2018 and subsequent policy work will commence in the second half of 2018.

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Interesting. In theory I like the idea, however in practice its sounds more like, "lets devolve responsibility to the Mandarins but keep over-sight and insist on multiple possibly (probably) mutually exclusive targets for them to achieve". Thus a) we get the control we want for politcal ebds, b) when it blows we blame someone else for the "cockup".


oh good another committee - and in one flash what little shred of Independence evaporates! So now we can blame the RB for unemployment, debt, interest rates, growth, inflation - why not add that monetary policy should also reduce homelessness, crime, and the number of offenders in prison - then we can do away with Government

Always sad when its starts with - " its served us well - done a great job " and ends with so we intend to change it - remove half its powers - add three people we chose to the committee oh and have an observer to tell you what fiscal policy should be!

I wonder what weighting is put on employment part of the equation. Maybe they don't want to divulge that because if say a large company were to go bust due to incompetence or fraud or buying into a Chinese company that had fudged its books, surely that would not be allowed to influence the cash rate at all?

Stupidity now a dual mandate decision making is now conflicted. Central banks cannot create employment their role should only be to create stable prices and stable financial conditions the economy does the rest. The tentacles of the Govt reach further and further on many fronts we are rapidly moving towards a central controlled and planned economy look what history tells us about that.

Hmm, I dont agree here. There seems to be some evidence that the RB policy in setting the OCR can create employment by making business borrowing "cheap", and reduce the speed/degree on un-employment in a down turn (but are frequently too late in acting) but yes its effect is probably quite limited and of a limited time frame.

They can't effect employment, just like they can't reverse the ageing process of a demographic.

But you can keep inflation at 2% regardless

Are you saying that they could increase the OCR to 20% tomorrow and not effect employment?

They can't increase the OCR to 20% tomorrow, ya dingleberry. They'd only effect unemployment at the RBNZ as the whole market would deal on a 20% interest rate and they'd go broke pretty quick trying to fund that negative carry.

Does nobody realize that the RBNZ doesn't set the interest rate? It just follows the natural rate

No these are different things. The latter is a physical fact at least where science stands today (but check stem cell research, for instance they hope to re-grow teeth) , the former is not.

Otherwise this seems to be pretty classic economics 101. "When the Reserve Bank lowers the cash rate, this causes other interest rates in the economy to fall. Lower interest rates stimulate spending. Businesses respond to this by increasing how much they produce, leading to an increase in economic activity and employment."

Now in our present circumstances this may indeed be the result of many counter-factors.

Oh an interesting paper is this,

Calm the farm Colin. Stupidity is to continue doing nothing as our previous government did, to confront the wage gap, homelessness and the degradation of our environment. If you're going to talk history, I'd reach back a little further than the Muldoon command economy era. Post WW2 until 1984, every NZ government prioritised full employment. The dogma that only prioritises inflation and lets the market sort the rest has failed for most of NZ, who are more impoverished than they have been at any time since the 1930s. Time to ring in the changes.

It is Government that chooses the unemployment rate. It ways has been.

Um, no, please justify your claim.

I'll justify it for them.

Of course the Government does to some degree.

We have transfers, fiscal policy, and employment policy - all of which impact the natural rate of unemployment.
There is some correlation (perhaps even causation) between changes in unemployment and interest rate movements (what is now termed as the modern Phillips relationship). Importantly though the real interest rate doesn't neccessarily set the employment rate.
Well, it shouldn't.
I haven't seen a DSGE where that is the case, either.

You are forgetting the correlation between the minimum wage / benefit levels and unemployment. If you abolished both the minimum wage and the dole you would likely get higher employment rates.

We have transfers, fiscal policy, and employment policy
Specifically employment policy - a catch all for all regulated employment matters. i.e. minimum wage.

Higher inflation with lower interest rates? Will eventually lead to higher employment I believe? Am I missing something? House price inflation also as far as I can see with lower interest rates with the higher inflation.

I would have said that lower interest rates would lead to higher employment if it causes businesses borrow to expand. There may not be higher inflation though unless there is a labour shortage driving up wages, which was the mistake in the 1970s. So I think its probably safe to use policy to bump things but not to sustain longer term.

Written by Don his extreme right wing opinion is ....his opinion.

On the other hand....

Back when America was just being founded they reckoned that a flat % tax rate was fair and that taxing anyone at a higher rate than anyone else was undemocratic. If Brash is the extreme right I wonder where George Washington sat on the spectrum?

Well, it does seem fair doesn't it? If you earn twice as much as someone else you pay twice as much tax

Thank goodness I put my money on TD for a max of one year as I suspect those of us who are net depositors will subsidise the borrowers ad infinitum with low interest rates.

Yes we are going back to the norm of a low interest rate world.

Its simple really if you want a higher rate of return invest it in areas/sectors giving you the return you desire. Want 8%? well corporate bonds might be the answer for you, but of course the risk is loss is substantial.

Want a risk free rate of return? no such thing but taking your money out of a bank might be a good idea.

I'd also suggest that 1 year in a deposit is a bit long in case we start to see OBR's coming, we'll have time to run but not that much time I suspect. Of course the Q is then where to run to?

good luck.

My goal was to wait for a downturn and invest in small Private Equity opportunities, but that may be stymied by low interest rates. I suspect I'll end up enhancing the family home to accommodate 'boarders'. However, I don't want to run foul of any new rules so I'll wait to see what the TWG come up with. I don't want to end up with Land Tax, CGT, higher rates or other liabilities. I don't see them attacking boarders but you never know.

Once you get a downturn I suspect small is bad.

"enhancing the family home" actually one of my thoughts is if you dont need to take on debt to do it, buying the biggest solar panel that will go on your roof might make sense. ie the capital is reasonably safe from "being stolen" ie via OBR events, your power bill drops substantially and you can get an income.

So in my case my gross power bill is $3200 per annum so I have to take out standing charges and consider the NET transmission to the power company as an income. The Q is then is that giving me more than 3%?

RBNZ's work is based on the Phillips Curve -- low unemployment rate correlates with high inflation or LOW inflation correlates with high unemployment rate.

Let's see if RBNZ make the two things at each side of the scale work.

Sort of...

For instance our employment rate right now is pretty low, yet our interest rate is very low, hnece there has to be more to this than it appears.

The more to it is that the RBNZ do not use the original Phillips Curve.

They use an augmented version for structural justification.

Two targets with one key tool is never going to work. It is, as many have alluded to, simply a method of passing responsibility for poor economic performance to the Central Bank.

Indeed, I do think the present Govn is passing the un-solvable onto someone else. The Q is what is the loading, or what is the priority if you will.


So if the OCR is at 2% and showing signs of going up but un-employment is at 7% and also going up? then what? I would tend to see this as a repeat of the UK's 1970s disastrous experiment if let off the leash. Sadly in order to contain inflation the only tool I can see to do so is kill the economy and drive up un-employment which would be against this Govn's "wishes".

Who knows?
Normally we could look at this to see what the response would be...

Obviously a huge amount of work needs to be done to redo KITT now for a dual target.

What is employment? Our statisticians define it as 1 or more hours work in a week. So about 4% or one in 25 is unemployed. That can be between jobs and those who are almost unemployable but it still means an average of 2 years of your adult working life unemployed - expressed like that it seems a high figure. The problem is under-employment which is all the people looking for more work typically a part time worker who would like full time work if it was available. That is 12% or one in eight.

I dont dis-agree, but not I suggest in the context of this thread.

PS Actually I suspect this effect is being under-appreciated, but I cant get my head around it, but then Ive yet to see any good writing on it either.

Phillips curve is broken, they won't make either work.

The Phillips curve may be broken for good

IT HAS long been assumed that economic policymakers face a trade-off between unemployment and inflation. Let unemployment fall below its “natural” rate (the level of joblessness that results merely from the normal patterns of job gains and losses at any one time) and the economy could overheat, causing inflation to spiral out of control. The Federal Reserve chair, Janet Yellen, alluded to this relationship in a speech in September when she warned that, left unchecked, America's healthy job growth could create an “inflationary problem down the road”.

But a growing number of economists now say that the trade-off, known as the Phillips curve after an economist who described it in a 1958 paper, no longer holds.

The Phillips curve was broken the moment it was published.
It was nothing more than a short-medium run correlation.

The relationship it established is still extremely important in the majority of dynamic models used by monetarists today. However, this relationship is pretty different to the relationship you allude to.

It broke down properly after 2005, and 2014 in the domestic sense, thats why the RBNZ has cut rates so aggressively. Demographics are weighing on the inflation impulse since 2014, and 2005 globally.

Inflation is going to be let run high under the excuse of employment.

This is how they stop the housing bubble imploding from higher rates as inflation returns.

Crooked bastards.

it will increase future CGT revenue and income tax revenue though. Seriously, are we returning to the '80s where pay rises made us feel better until we realised we were going backwards?

I hope not, I remember how bad it was in the UK in the 70s, dont want to repeat that, on many levels.

The thing is that lowering the OCR or QE-ing doesn't actually do much for increasing investment in the real productive economy. We should be awash with buoyant business investment if that were to be the case after the last 10 years of low rates. But it's wrong. It just inflates asset prices.
Demand and the prospect of increased sales is what gets business investing, increasing output and employing.
Which is why instead of focusing endlessly on monetary policy quibbles, we should be looking to fiscal policy. Lowering the OCR to 0 from 1.75% won't do much come the next shock. Impotence is a word that comes to mind.

For me , This is another sign that we are slowly moving into an inflationary environment.
From 40 yrs of watching.... I kinda feel that Politicians and Beauracrats are .."late responders".. ie. they tend work from the "rear view mirror".... ie.. they extrapolate the past.

Sounds cynical....but I use this as a kinda , Contrary opinion tool...

I agree on "late responders", but not on us entering a significant inflationary environment. Not unless they start to seriously mis-manage the economy.


I don't think any inflationary pressures need to be significant.. Central Banks will be very limited in how they will be able to respond to even 2-3% inflation.. Will not take much of a interest % movement to send an indebted world into a recession..
In NZs' case, if because of this new employment focus, the RBNZ delays action and then has to raise rates too high, too fast..... it may result in serious drama.. just my view.

Means nothing without definitions for the core elements of PTA 1(b):

'Sustainable' - at what level of comfort, and how measured. Tyrannies built on armed force and fear are 'sustainable' at the millennial scale. So are hunter-gatherer and subsistence-farming configurations, assuming lotsa land and few folk. Careful wotcha wish for....

'Contribute to' - to what degree of demonstrated nudge, regulation, RBNZ dial tweak or other policy lever. Supposing Tiwai Point goes tits-up, with a regional impact of 5-10,000 jobs. What is RNZ gonna 'contribute', over what time-frame, according to what correlation measures, with what collateral damage?

'Employment'. ACA in the US shows that 'employment' is a flexible term: as it cut in at 30 hrs/week, suddenly great swathes of the labour force found themselves on 29.99 hrs/wk and no healthcare via ACA. What's the RBNZ gonna do, to who, and when, if something similar occurs here?

The 'levers of power' - the phrase itself betrays the mechanistic POV underlying it - are only very loosely connected to any of these measures, and then with near-unquantifiable leads or lags.

Thought experiment: if there's a major interruption to international shipping, whereby flows of exports Out, and imports, particularly of energy and capital goods In, are slowed or stopped, most inventory-less systems are gonna be toast within days, weeks at the outside. In the same vein, a wobble in long-haul air will cut tourism off at the knees, Finally, there could easily be a sudden drop in liquidity, as happened during the GFC.

Good luck to the RBNZ getting a handle on both inflation And employment....we are a very small boat in a stormy sea.

So if the OCR is the main tool to controI inflation, what is the RBNZ's main tool to control employment?

IMHO it's confused to add low-unemployment to low inflation. Low-unemployment is a desired outcome that is to some degree a result of inflation, isn't it?

Ray Dalio has a very simple economic machine model...

Demand is a function of money + Credit.

Credit is the most easily influenced factor. AND...Credit is Debt... ( the accumulation of debt has short to medium term growth outcomes, BUT... over time it is sowing the seeds for a very, very inevitable downturn )

A problem is that the nature of man is such that the credit factor ends up creating and amplifying a business cycle ... Exuberance and Fear take things to extremes.
At the extreme of exuberance , loans are made to not so credit worthy borrowers, and as markets turn , the ability to service debt becomes an issue.

Employment ebbs and flows along with this business cycle.

By putting employment into the RBNZ policy agreement, my view is that I don't see that it will be possible for the RBNZ to do the right things at the right time, within the context of the business cycle.
Maybe its impossible..??

The world has had a grace period , where Central Banks could lower interest rates as each recession came along, in order to stimulate the demand for credit.
With interest rates now so low, I'm thinking that it is causing structural damage to the underlying principles of Capitalism, in regards to how we save, price risk, the time value of money.. This all manifests as over capacity, malinvestment , Asset mkt booms etc,,..etc..

Not at all healthy for the longer term .