Labour has formally announced its desire for the Reserve Bank of New Zealand (RBNZ) to use monetary policy to try and target full employment alongside its price stability mandate.
It has also outlined how it would change the Official Cash Rate (OCR) setting process, with a voting committee of the RBNZ Governor, two Deputy Governors and Chief Economist to be joined by three external appointees. Treasury will have a non-voting input.
Labour finance spokesman Grant Robertson announced the policy Monday morning, ahead of a midday speech to a Victoria University symposium on monetary policy.
This follows a report on Saturday that Finance Minister Steven Joyce had requested the State Services Commissioner look into the merits of a formal OCR rate setting committee; RBNZ governor Graeme Wheeler already runs an informal one with his two deputies and one assistant governor.
Back to the future
The policy reveals how Labour would look to alter Section 8 of the Reserve Bank Act, which stipulates the objective of the Bank’s monetary policy function as price stability. By including full employment alongside price stability, the bank would be given a dual mandate for monetary policy.
Robertson has based the inclusion of a full employment target on central bank legislation in Australia and the United States. “The evidence is that those countries who have a dual mandate perform better or as well as those with a single mandate at managing inflation,” it says in the policy announcement.
Australia’s Reserve Bank Act was introduced in 1959, while the US Federal Reserve Reform Act was introduced in 1977. New Zealand’s latest Reserve Bank Act came into force in 1989. Read Alex Tarrant’s article here on how the New Zealand Act previously referenced employment goals (1950 and 1969 revisions) before the Lange Labour government removed mention in 1989.
Dual or duel mandate?
The change Labour is proposing to the Act is not set to include explicit reference to when the Bank should favour full employment or price stability over the other.
But, Robertson told interest.co.nz the Bank itself would at times in the economic cycle be expected to communicate which of the two mandates it was leaning more towards, if any, similar to his comment to Brian Fallow in March.
Likewise, Robertson said Labour was not proposing the Policy Targets Agreements between the Minister of Finance and the RBNZ Governor would state a preferred mandate. While Labour would keep an inflation target in the PTA (Robertson mentioned 1-3%), it will not nominate a specific nominal employment or unemployment goal, he confirmed.
If the proposed changes had been in place over the past few years, Robertson said he believed the inclusion of a full employment goal alongside price stability would have meant the Bank would not have raised the OCR as it did in 2009 and 2014. It could have indicated at the time that, because of low inflation, it was putting more weight to its employment goal, he said.
Treasury input in OCR decision
Meanwhile, the changes to the rate setting process would effectively allow the Finance Minister, via a Treasury official, a seat at the table. Labour is proposing one Treasury official sits on the new rate-setting committee, although this person would be the only one without voting power.
Robertson told interest.co.nz this move was designed to allow Treasury to provide input on the government’s fiscal forecasts and the fiscal policy track.
The Treasury official would sit alongside three voting appointees from outside the Bank and Treasury, the Governor, two Deputy Governors and the Bank’s Chief Economist, in a move modelled on the Bank of England’s Monetary Policy Committee.
The three externals would be appointed by the Bank’s Governor, in consultation with the Minister of Finance, Robertson told interest.co.nz. He envisaged they would more likely be academics or recently retired public sector people rather than current private sector appointees like CEOs of major companies.
Potential conflicts of interest would be dealt with by having minutes of the rate-setting committee’s meetings published within three weeks, noting dissenting views. Robertson said the external appointees would likely be limited by statute in what they could say on monetary policy outside of the meetings.
Read the full announcement from Labour below:
28 years on from the passing of the Reserve Bank Act much has changed in the way the global economy and the New Zealand economy operates. The failure to meet our agreed inflation goals for the past four years has raised questions about whether monetary policy is making a decisive difference to the successful operation of the economy.
In the face of this evidence we believe the time is right to review the Reserve Bank Act. Our approach would fully protect the independence of the Bank - whilst allowing monetary policy to play its part in meeting the economic goals of the country.
At the outset of this process we want to signal two proposed changes to the Reserve Bank Act 1989. We also want the review to consider the adequacy and relevance of the measures and tools used by the Reserve Bank, and will work with the Bank on this once in government as part of the review.
1) Broadening of the objective of the Bank (Section 8 of the Act) from just price stability to also include a commitment to full employment.
We have seen the damage that out of control inflation can do to our economy and to our citizens. It is our most vulnerable who are the most affected by rising prices. It is right that we should continue to have price stability as a focus of monetary policy. It would be our intention to continue the inflation goals currently in the Policy Targets Agreement.
The next Labour government is also determined to focus on the creation of decent work with high wages. We want all parts of our economic system working towards that goal. Countries like the US and Australia have commitments for full employment within their Central Bank legislation. The evidence is that those countries who have a dual mandate perform better or as well as those with a single mandate at managing inflation.
2) Change to the decision making process of the Bank so that a Committee, including external appointees, will have responsibility for setting the Official Cash Rate. The Committee will publish the minutes of its decision within three weeks, noting any dissenting views
Having a single decision maker for OCR decisions is out of step with international practice. We propose that the existing governing committee of the Reserve Bank be joined by three independent experts. We would expect them to make a substantial time commitment to this work. The appointment of the experts would remain in the hands of the Governor, though would be subject to scrutiny as part of the Finance and Expenditure’s review of the Bank.
To help sustain public confidence in the system, we are proposing putting the minutes of each meeting of the Committee on-line within three weeks, including the result of any vote. This is done in a number of other jurisdictions. It is important that a public institution making as important decisions like the Reserve Bank, has this level of public transparency.
RBNZ Staff would continue to prepare projections and financial information for the Committee. The RBNZ Board would still have retrospective oversight of the committee’s decisions, and would hold it to account for any systematic errors or omissions.