sign up log in
Want to go ad-free? Find out how, here.

A new RBNZ Policy Targets Agreement is due before Adrian Orr takes the RBNZ’s top job on March 27. What it will say is the subject of much debate

A new RBNZ Policy Targets Agreement is due before Adrian Orr takes the RBNZ’s top job on March 27. What it will say is the subject of much debate

By Jason Walls

Economists and Reserve Bank watchers are awaiting March 27, when new Reserve Bank Governor Adrian Orr takes over, with great anticipation.

Orr is seen by many as a highly capable economist and a great communicator, with financial markets eager to assess his approach to monetary policy.

It’s only nine more sleeps.

In the meantime, it’s just four more sleeps until the next Official Cash Rate (OCR) review on Thursday.

You would be forgiven if you didn’t know it was coming. In terms of what to look out for, no one is expecting much of anything from the OCR review.

The OCR will remain on hold at its record low of 1.75%, and its very unlikely outgoing Acting Governor Grant Spencer will do anything to rock the boat.

The event which has really got economists talking is the unveiling of the Policy Targets Agreement (PTA), likely to be announced later this week, according to ASB.

With a new Government and RBNZ Governor, the document is highly significant – especially given the current review of the RBNZ Act and the changes Finance Minister Grant Robertson has indicated he plans to make.

Details of the plan to add employment to the Reserve Bank’s mandate alongside price stability will be watched closely.

“I understand the limits of monetary policy, Robertson told me last week, “so we want [the Reserve Bank] to be considering maximising employment but, unlike a particular inflation target, we would not be seeking a particular employment target through monetary policy.

“What we want is the bank to play its appropriate role in maximising employment that will not include a specific employment target.”

This will come as welcome news to some, such as former head of the Reserve Bank’s Financial Markets team Michael Reddell, who has been advocating for a non-numeric focus.

But the specific wording of how employment fits into the bank’s mandate is important.

Westpac Senior Economist Michael Gordan is not a fan of the phrase “maximising employment” and thinks the PTA would be better served if the phrase “full employment” was used.

“’Full’ employment – in the sense of a level that’s sustainable over the long run – is more symmetrical than the Finance Minister’s preferred phrasing of “maximising” employment. The latter is more likely to come into conflict with the RBNZ’s inflation goals at some point in the future.”

But Cameron Bagrie of Bagrie Economics says both “maximising employment” and “full employment” are both problematic, as it’s difficult to frame objectives around terms like this.

“That’s like trying to win a cricket match by maximising the number of sixes you hit; the strategy might come off once in a while, but there’s a fair chance it won’t.”

Will the price stability focus change?

On inflation, Robertson says “the indication I gave as far back as last year is we would maintain the broad inflation target that has been in existence.”

The current PTA between Robertson and Spencer outlines the bank’s commitment to keeping inflation between 1% and 3% on average over the medium term, with a focus on keeping future average inflation near a 2% target midpoint.

The 2% target was added when Graeme Wheeler took over in 2012.

“He did so mainly to send a message he wouldn’t be comfortable running at/near the top of the 1% to 3% band, as was perceived to be the soft target of [Alan] Bollard,” says BNZ senior economist Craig Ebert.

“Removing the reference to 2%, per se, would simply [suggest] a return to what we had.”

But some economists, such as Capital Economics’ Paul Dales, believe inflation targeting is not as important as it used to be.

He says in the future, central banks will put less emphasis on inflation and more emphasis on financial stability.

But for now, he is not picking any changes to the PTA in terms of how it targets inflation.

Reddell says the reference to the 2% midpoint should be retained.

“In the current climate, getting rid of the 2% reference would reinforce Reserve Bank’s biases towards delivering inflation too low (core has been around 1.4% for years now) and risk undermining the focus on employment/unemployment the Government tells us they plan to add.”

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


It's Sunday morning.Asset price targeting should be plonked directly on the RBNZ remit.


From what I can see that’s the justification RBNZ already use for their bias for sub-target inflation rates.

What I’d ask is if RBNZ has and is comfortable using a wider range to tools. So far we’ve only really seen RBNZ use the OCR and a macroprudential tool (LVR). If they are going to be given a wider range of targets they also need a wide range of tools they are capable of effectively using and willing to actually deploy if/when required.


What's the specific mechanism RB will use to perform its appropriate role here? Cut the OCR?


They really need to review the whole inflation/OCR model that they use to regulate the economy.
At higher than normal inflation rates it seems sensible and works. At lower than normal inflation rates it works very poorly and has a few very undesirable side effects. We have just witnessed about 10 years where the only significant effect of lowering interest rates was to produce a massive asset bubble (which in all likelihood will lead to another crash, the very problem that it was supposed to fix.) In depressed conditions lower interest rates seem to encourage people to save more and seek the "security" of fixed assets rather than the more desirable spending and investing in production.
The notion that inflation must always be meaningfully positive is also rather suspect. In a successful economy productivity should always be rising, the corollary being that real prices should be falling. However under the present model if prices fall, The reserve bank is required to lower interest rates to stoke inflation. As we have seen this inflation tends to occur in the price of fixed assets, notably houses. Accordingly consumers and the general population are denied the benefits of increased productivity by ever increasingly expensive housing and a few other consumables that are able to occupy markets were competition is limited, i.e monopolies and duopolies. I suspect that this problem may well be the cause of the boom bust cycles that we have suffered and huge wealth transfer from average citizen to the super wealthy. If you think back this all started after the 1987 crash which was when this reserve bank control mechanism was introduced.


Excellent observation and I completely agree. At some point in the near future, consumers won't have any disposable income left over to buy goods and services because half of their income is already being paid via mortgage debt or inflated rents. Sooner or later this lack of disposable income will collapse businesses, the banks and house prices. Once the jobs go, we might just see our first real "crash" in this country.