By Roger J Kerr
Whenever I am reviewing the appropriateness of a treasury management policy document for a corporate client I always put a large red line through any management decision-making structure that incorporates a treasury committee.
In reviewing how the Reserve Bank of New Zealand reaches decisions on monetary policy the authorities in Wellington should also put a similar line through any suggestion that committees make better decisions than individual management functions having the direct responsibility and accountability for being on the spike.
A RBNZ study has confirmed that most western central banks do not entrust monetary policy / interest rate decisions to committees with external members (which is the model favoured by the Green and Labour political parties).
My point being that I would not entrust decision-making responsibility to any committee no matter what its composition.
Committees by their very nature do not make good decisions, responsibility is obfuscated, accountability is not sheeted home and if consensus is not achieved they wait to the next committee meeting to discuss the issue again.
A robust governance/management structure in the fast moving world of business and financial markets beats school committees any day when it comes to outcomes.
The New Zealand model of having the monetary policy responsibility firmly on the Governor’s shoulders with adherence to the Policy Targets Agreement set by the Minister of Finance has worked very well over the years.
So what is the strong reason to change it?
Of course the Governor now takes counsel from his senior management team in reaching monetary policy decisions, just as any Chief Executive does in managing a business.
The Chief Executive is ultimately responsible to the Board of Directors for performance.
The Board’s role is to appoint/fire the Chief Executive, set policies, ensure compliance and oversee strategic direction.
Changing the monetary policy responsibility on to the appointed Board of the Reserve Bank, as the Greens are suggesting, raises all sorts of new risks.
The Board may well be more representative of the wider economy than the RBNZ management team; however you would question whether such lay folk have sufficient understanding/experience of global financial markets, the NZ economy and our banking transmission systems to take on the responsibility of our monetary policy decision making.
Right now the RBNZ Board consists of a University Chancellor (and former RBNZ deputy Governor), a University professor, a banking/securities lawyer, a venture capitalist living in the US, a professional director/accountant, an ex fund manager and a consulting research economist - all very capable people, however not at all representative of the wider NZ economy which is dependent on big primary industries, construction / property / manufacturing industries, agriculture commodity prices and the exchange rate.
The problem with the Greens’ model is that you end up with politically motivated or single-agenda type appointments to the Board that runs the risk of monetary policy being pushed in dangerous directions.
We are far better off having a RBNZ Board centred on governance and holding the Governor to account for performance and firing him/her if they fall short and breach the PTA on too many occasions without good reason.
Having the Board itself making the OCR interest rate calls is a recipe for disaster as the “management on the spike” accountability is lost.
To be fair all the major central banks around the world operate monetary policy by committee (e.g. US Federal Reserve, ECB, RBA, BoE) with only the Bank of Canada having the same regime as us with the power entrusted solely with the Governor.
The RBNZ are reviewing the sole decision-maker role, however “not as a matter of urgency” would get agreement from my side.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com