The Government is considering adding employment to the Reserve Bank’s price stability objective.
It is also considering stripping the Bank’s Governor of some of their power by introducing a committee decision-making model for monetary policy decisions.
Finance Minister Grant Robertson has confirmed this, releasing the Terms of Reference for the Government’s review of the Reserve Bank Act 1989.
“Today’s announcement delivers on the coalition agreement signed between Labour and New Zealand First to review and reform the Reserve Bank Act,” Robertson says.
“The current Reserve Bank Act is now nearly 30 years old. While it has served New Zealand well in general, now is the right time to undertake a review to ensure our monetary policy framework still provides the most efficient and effective model for New Zealand…
“This review will be undertaken in two phases. An Independent Expert Advisory Panel will be appointed by the Minister of Finance to provide input and support for both phases.
“Phase One of the Review will focus on the election commitments made by Labour to add maximising employment to the price stability objective of the Bank, and to provide for a committee decision-making model for monetary policy decisions.
“In addition, the Review will consider whether changes are required to the role of the Reserve Bank Board as a consequence of the alterations to the decision making model.”
These proposed changes are in line with other central banks around the world.
Robertson goes on to explain: “The Reserve Bank and Treasury will work jointly in Phase Two of the Review to produce a list of areas where further investigations of the Bank’s activities may be desirable. This list will be produced in consultation with the Independent Expert Advisory Panel.
“The list, and the next steps for the review, will be outlined in early 2018. This work will incorporate the macro-prudential framework review that had already been scheduled for 2018.”
Joyce: Employment objective 'redundant at best'
National's Finance Spokesperson Steven Joyce has responded to Robertson's announcement saying: "The Bank already takes employment into account when setting interest rates so this makes Mr Robertson’s plan to introduce maximising employment as a second objective for the bank redundant at best, and potentially confusing."
In any case, he points out New Zealand has the third-highest rate of adult employment in the developed world.
“Monetary policy can only work successfully alongside appropriate fiscal and microeconomic policy settings and these are controlled by the government of the day," Joyce says.
“Regardless of what he writes into the Reserve Bank Act, it will be Mr Robertson that is accountable for any decline in employment in the New Zealand.
“National is supportive of potentially formalising the current informal decision-making committee process of the Bank. However we will be watchful for any plan to introduce outsiders onto the committee because that could blur the Bank’s accountability.
“We will also keep a watching brief on the second part of the review. We appreciate that part is largely a pro-forma nod to Labour’s coalition agreement with New Zealand First and the very negative views Mr Peters has of the modern and open New Zealand economy. We will be vigilant for anything which would be detrimental to the economic future of New Zealanders.”
Westpac chief economist Dominick Stephens has responded to the Terms of Reference saying: “We cannot anticipate what Phase 2 will cover, but at the press conference the Minister of Finance was quoted as saying that he had no desire to include the exchange rate in the review.
“This last detail will be seen as a positive by those who favour orthodox monetary policy. We believe that this comment was the reason for the positive market reaction to the news.
“The NZD rose 0.7%, presumably as markets were able to rule out actions specifically designed to lower the exchange rate.”
Kiwibank chief economist Zoe Wallis says: “We don't expect the review of the RBNZ act to have a material impact on the operation of monetary policy in the near-term.
“Adding a specific employment focus is unlikely to see a set employment-related target and hence there will remain flexibility in the implementation of monetary policy around current guidelines and giving consideration to a wide range of variables.
“Unless we see wholesale change in the RBNZ's operating framework, we still expect to see interest rate hikes from late 2018...”
Policy Targets Agreement re-signed
Robertson has today also re-signed the current Policy Targets Agreement with Reserve Bank Acting Governor Grant Spencer.
The agreement requires the Reserve Bank to keep future consumer price index (CPI) inflation outcomes between 1% and 3% on average over the medium term, with a focus on keeping future average inflation near the 2% target midpoint.
“The renewed PTA will continue to provide continuity, consistency and stability for the monetary policy target during the period of review of the monetary policy provisions of the Reserve Bank Act, and ahead of the appointment of a new Governor,” Spencer says.
Spencer says the Reserve Bank welcomes the Review of the Reserve Bank Act and will work with Treasury on it.
“The Reserve Bank has been subject to several reviews in the past. The Terms of Reference state that the operational independence of the Reserve Bank remains paramount and will be protected,” Spencer notes.
Spencer's term is due to finish in March. A new agreement in line with the outcomes of Phase One of the Review will then be negotiated with the new Governor.
Credit rating agency Moody's describes the Reserve Bank as a highly credible and effective central bank.
"Potential changes following the review that would enhance transparency and effectiveness of monetary policy would be credit positive," says Moody's.
Copy of Reserve Bank Act Review Terms of Reference
Terms of Reference The review will be undertaken in two phases of work.
The review will:
• recommend changes to the Act to provide for requiring monetary policy decision-makers to give due consideration to maximising employment alongside the price stability framework; and
• recommend changes to the Act to provide for a decision-making model for monetary policy decisions, in particular the introduction of a committee approach, including the participation of external experts.
• consider whether changes are required to the role of the Reserve Bank Board as a consequence of the changes to the decision making model.
A Bill to progress the policy elements of the review, including on the details necessary to introduce a potential committee for monetary policy decisions, will be introduced as soon as possible in 2018. This will give greater certainty on the direction of reform in advance of the appointment of the next Reserve Bank Governor, currently scheduled in March 2018.
Phase 1 of the review will be led by the Treasury, on behalf of the Minister of Finance. The Treasury will work closely with the Reserve Bank who will provide expert and technical advice. An Independent Expert Advisory Panel will be appointed by the Minister of Finance to provide input and support to both phases of the Review.
In line with the Government’s coalition agreement to review and reform the Reserve Bank Act, the Reserve Bank and the Treasury will jointly produce a list of areas where further investigations of the Reserve Bank’s activities are desirable.
This list will be produced in consultation with the Independent Expert Advisory Panel. This list, and the next steps for the review, will be communicated early in 2018. This phase of the review will incorporate the review of the macro-prudential framework that was already scheduled for 2018.