Robertson unveils Terms of Reference for Reserve Bank Act review

Government considering adding employment target to the RBNZ's price stability objective, and introducing a committee decision-making model for monetary policy decisions; Opposition says employment objective 'redundant at best'

7th Nov 17, 10:27am by Jenée Tibshraeny

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.”

Economists’ responses

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.

Phase 1:

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.

Phase 2:

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.

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26 Comments

by sammnz | 7th Nov 17, 10:48am 1510004920

It's going to be interesting to see when Labour keeps their election promises to lower debt to 20% of GDP when National have been criticising them for spending too much.

by dictator | 7th Nov 17, 11:19am 1510006760

Abandoning the Philips curve will provide an interesting example. With the focus on maximising employment we should all benefit. However I'll wait and see what's actually implemented.

by Boatman | 7th Nov 17, 12:27pm 1510010856

@dictiator , I would love to see Gareth Morgans response to this unorthodox idea of ignoring the Phillips curve.

He is an old-school economist ( with some interesting ideas ).

My concern is that we are already close to full employment anyway , so whats the point of tinkering with the machine that is running so well ?

by dictator | 7th Nov 17, 12:30pm 1510011043

It seems to be running well because RBNZ have little or no control over what's going on. Why change what doesn't actually function? All good questions but maybe keeping up appearances is more important.

by sharetrader | 8th Nov 17, 7:35am 1510079728

depends how you measure unemployment as to where you think we have almost full employment http://www.stats.govt.nz/browse_for_stats/income-and-work/employment_an…

by pritchie2 | 8th Nov 17, 10:58am 1510091939

Surely "maximising employment" is ambiguous. If literally increasing the numbers of employees is the aim, then increasing immigration numbers (or just removing the cap altogether) and lowering the minimum wage would achieve that.

by bw | 7th Nov 17, 11:41am 1510008090

The RBNZ, and all Central Banks fullfilled a necessary function in a simple and/or regulated environment. The RBNZ, for instance, had a valid role to play when Exchange Controls and a Fixed Currency regime was in place. Once that was abolished, they became hostage to far cleverer people than they were, and still are today. No amount of tinkering with the Understandings or Agreements is going to alter that. Arguably a Central Bank's role is to oversee the amount of money in circulation in a domestic economy at any one time. Altering that amount controls behaviour. Once control of that sole function is lost, all is lost.....as any number of Panama or Paradise Papers might show....

by gingerninja | 7th Nov 17, 11:56am 1510008983

It's economics Jim, but not as we know it.

by Boatman | 7th Nov 17, 12:19pm 1510010393

WHY ?

Then

HOW ?

We are a free-market economy , and only the "amorphous" market can or will make employment decisions .

Its up to politicians to ensure the environment is such that the private sector want to grow and employ people.

It can never be done by a team of bureaucrats , whose sole function for the past decades has been to ensure financial and economic stability

by Foyle | 7th Nov 17, 12:46pm 1510012005

How? In keeping with Labour's back-to-the-70's industrial policies perhaps a dose of 70's style Statism where ministry of Works or Ministry or Railways would occasionally be ordered to take on 10,000 people to get the unemployment figures down.

Labour are obviously not overflowing with understanding of economics (believing for example that das kapital offers profound insight) and having selected a political studies BA as minister of finance.

Be very concerned as to how the guiding committees are selected. Should we for example expect marxists like Jane Kelsey to feature?

by bw | 7th Nov 17, 1:12pm 1510013526

You mean that's not better than Steven Joyce, our previous Finance Minister, who graduated with a BSC in...Zoology?!

by Casual Observer | 7th Nov 17, 2:54pm 1510019680

It appears our Minister of Education couldn't count today in parliament and gave in to a deal with National in order to get Trevor Mallard across the line as Speaker.

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11941411

by tothepoint - d… | 7th Nov 17, 7:33pm 1510036429

There's nothing wrong with a broad/liberal education for business/financial roles.

The best manager I ever had had qualifications in the arts and literature - and a background in policing. Another had a degree in mathematics.

People who can reason logically and have integrity have a particular advantage. But they can be hard to find in some workplaces......

by Stephen Hulme | 7th Nov 17, 12:24pm 1510010657

Westpac chief economist Dominick Stephens notes: “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 failure of orthodox monetary policy gifted Labour and it's coalition partners the chance to terminate it.

In political terms, it is just that simple and easy. Whichever party, in whichever country, stops listening to Economists and starts taking workers’ grave concerns for the serious matters they are will be positioned for electoral success now and well into the future.

Whatever you might want to call whatever economic condition we have been in for the last decade, depression works for me as a more-than-temporary destructive economic deviation, it is of an almost hidden or obscured variety.

One big reason for that is Economists. Politicians don’t want to challenge them not because they have great expertise about an economy, any economy, but because they speak in a foreign language that to an outsider sounds scienc-ey. The political class fears challenging the unemployment rate, which Economists have held sacred, for how they might be embarrassed on what are really unrelated topics. The issue for Economists is a particular differential equation when for the rest of the world it is work, the tremendous lack of. Read more

by Boatman | 7th Nov 17, 12:28pm 1510010906

Tinker with exchange rates at your peril

by dictator | 7th Nov 17, 12:39pm 1510011584

Have a look at how the Swiss have been manipulating their currency. Then look at how many central banks are heavily invested in US stocks. Or have a look at Norway's sovereign wealth fund that is requesting secrecy instead of publicly showing their holdings on their 13F.

Currency issues could lead to large sell offs of US stocks. For holdings that are not small or insignificant.

by Roger Witherspoon | 7th Nov 17, 2:07pm 1510016859

The most useful thing the RBNZ have done since (not during) the last crisis has been the core funding ratio. It worked brilliantly, so why didn't they do more of it? The LVR restrictions seem like weak actions by comparison. The core funding ratio basically sets out how much the foreign owned banks must borrow retail from New Zealanders and how much they can endanger themselves by borrowing wholesale from overseas. That is pretty close to the core of the problem, apart from making the NZ subsidiaries of foreign banks into independent publicly listed NZ subsidiaries that cannot be stuffed up by their owner's stupidity elsewhere.

by Stephen Hulme | 7th Nov 17, 2:26pm 1510017962

The most risky thing being the adoption of low, and in the case of Australian banks even lower self determined capital risk weights for residential mortgages, thus facilitating capital leverage, which in turn favours funding of a particular asset class over another. Read more (Page 45 0f 107 .PDF)

by Colin | 8th Nov 17, 11:16am 1510092993

Including employment is stupid a central bank should only focus on financial and price stability. In a stable economic environment employment will follow. A dual mandate subscribes to the idea a central bank can create sustainable prosperity using looser monetary policy.

by kane02 | 7th Nov 17, 4:11pm 1510024270

grant spencers facial expression in the nz herald online is priceless!

by Yvil | 7th Nov 17, 6:57pm 1510034259

Good to see that the new government realizes that their policies will lead higher unemployment rates (from the current 4.6% low) which the RBNZ will have to attempt to tidy up

by delboy | 8th Nov 17, 8:06am 1510081561

They successfully stuffed up the speaker vote yesterday so how on earth are they going to run the economy for the next 3 years. Hipkins was owned by Bridges and it was beautiful to watch.

by Didge | 8th Nov 17, 9:12am 1510085547

Get off the grass! Its a mere blip that is being blown out of context by the vested interests that control mainstream media propaganda.

by Fritz | 8th Nov 17, 9:34am 1510086861

question - why do the mainstream media seem to have a bias towards National?
I can't see anything intrinsically in the Nats policy or set up that would favour the media industry.
Other than, perhaps, a predilection towards a lower tax regime

by Alter Ego | 8th Nov 17, 9:11am 1510085473

Posturing does not an economy make.

All talk, no cooperation is a waste of my time, effort and money...something Politicians are very good at.

Perhaps we need to pay on results, not pratting about....eh Taxpayers.

Perhaps we need to work together, not at odds with each other.

Would actually make a nice change and an excellent Country.

But I would actually prefer it was normal...

Building Bridges is a diplomatic dream.

Teamwork is mine for this fine Nation...this New Election Year.

by bull | 8th Nov 17, 2:01pm 1510102879

Another mandate to consider for RBNZ means interest rates will be lower for longer, house prices and rents will increase or at least stay high. Together with a higher minimum wage, more employment red tape and pan industry agreements, employment will decrease, thereby hitting the poorer end of society with a double whammy. It is the employment mandate that northern hemisphere central banks have used to justify financial repression (lowering interest rates) and money printing, thereby setting the scene for massive house price and rent increases worldwide. This has benefitted governments, banks and the already wealthy, with only a very minor benefit to employment through trickle down of a small amount of this bonanza. Politicians interfering in markets usually have never ending unintended consequences. Central planning is no replacement for a genuine market. After we use the market where every citizen gets a vote to elect our governments, not a centralized bureaucracy.