Bernard Hickey senses the 'independence' of our monetary policy is evaporating as opposition parties make it political again; He thinks it will 'get ugly' from here. Your view?

By Bernard Hickey

New Zealand's businesses, borrowers and savers should prepare for an unprecedented bout of uncertainty around monetary policy in the years ahead.

Politics will matter just as much as economics for interest rates and the exchange rate in the years to come.

For more than twenty years, monetary policy has been firmly off the political agenda and set in stone by the 1989 Reserve Bank Act.

That truce ended this week.

It happened with a bang of sorts at a parliamentary select committee hearing in Wellington.

A newly emboldened collection of Opposition Party Leaders, including Labour Finance Spokesman David Parker, Green co-leader Russel Norman and NZ First Leader Winston Peters, challenged new Reserve Bank Governor Graeme Wheeler's defense of the current Reserve Bank Act at every twist and turn.

In recent weeks the potential coalition partners have been working together to call for an official inquiry into the slump in manufacturing jobs and to call for monetary policy changes to lower the New Zealand dollar.

The Greens have even called on the Reserve Bank to print money to buy Government Earthquake Bonds to help finance the Christchurch rebuild.

This was Wheeler's first appearance before the Finance and Expenditure Select Committee and it didn't go well.

Wheeler had primed the opposition members with his October 26 speech setting out his stall in favour of pure inflation targeting, a hands-off approach to the currency and a staunch opposition to money printing.

Wheeler's approach is clearly more othodox than that of his predecessor Alan Bollard and it sets him up for a direct clash with any new Labour/Green/NZ First coalition government if it were to be elected in 2014.

If Wheeler is true to his word, as outlined in the speech and in his first appearance before the committee, he would not be able to 'fudge' a new Policy Targets Agreement with any new government.

Any attempts by a new government to change the way the Reserve Bank ran monetary policy would require a complete reworking of the Reserve Bank Act to include multiple targets, the ability to intervene in the currency and bond markets, and potentially a change in the way decisions are made. At the moment all these decisions are vested in the hands of one man, the Governor, rather than through a Monetary Policy Committee or board, as is the case in most other central banks.

How this changeover is managed could get ugly.

Market expectations about interest rates closer to the 2014 election (or at any other time if there was a snap election) would have to take into account the risk of a clash between the Governor and a new government.

Would the Governor be forced to resign? Would a new Government have to wait for Wheeler's five year term to expire in 2017 and then appoint a replacement? Would a new government change the Reserve Bank and force him out? Would this mean interest rates and the currency would be lower without Wheeler in place?

This is new territory for business decision makers, savers and borrowers alike.

Until now it was relatively easy to set expectations as long as viewers understood the current framework and knew what the Reserve Bank's expectations were for the economy.

All of that goes out the window in such a politicised environment where the future Governor and the way the bank operates is uncertain.

That is the price to be paid because of the break-down in the political consensus on monetary policy that has been building since just before the last election and has now burst out into the open with the National-led Government's appointment of a hard-line orthodox Governor wedded to the Reserve Bank Act.

Wednesday parliamentary committee hearing broke up amid acrimony with the Governor and the media being tossed out while the committee bickered over procedural matters.

The opposition MPs wanted more time to question Wheeler, but were blocked by National's committee chair Todd Mclay on the grounds the meeting had run out of time.

It was a fractious beginning for the new Governor. He can expect many more to come.

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This item was first published on the Herald on Sunday. It is used here with permission.