The changes announced regarding the Reserve Bank's handling of monetary policy look sensible, but with legislative changes still to come there may yet be room for surprises

The changes announced regarding the Reserve Bank's handling of monetary policy look sensible, but with legislative changes still to come there may yet be room for surprises

By David Hargreaves

Well, so far so good, but let's see how it's looking when it's finished.

That would be my immediate reaction to the Reserve Bank and monetary policy changes announced on Monday.

I don't agree that putting reference to employment into the Policy Targets Agreement is in itself the slippery slope that some of the more hysterical comments out there in reaction to it would suggest.

I would have been concerned if a specific target had been put in there - such as numbers of jobs to be created, or an unemployed number, or an unemployment rate.

However, by having the target as magnificently broad as "maximum sustainable employment" this means that the RBNZ can effectively change the view of what 'maximum sustainable employment' is as circumstances dictate. It means that it won't have to be pushing interest rates in a certain direction to chase a specific employment number. If it did have to do that then this could obviously clash with that other number it has to look at, the inflation target.

And that's where you could get the serious conflict that those opposing adding further objectives into the PTA have.

To go back to the beginning though and my 'let's see how it's looking when it's finished' point, upcoming legislation to amend the Reserve Bank Act will allow for a dual policy mandate.

At the moment the Reserve Bank's primary objective is "price stability", IE inflation targeting. Employment is to be added alongside that. Now, if there was any suggestion that under the legislation we do see any more specific employment target, such as a number, or if employment is in some way given precedence then I think there would be concern.

So, hence the fact that it will be worth keeping a very close eye on the devil in the detail of that legislation.

In terms of the formation of a committee to set interest rates, this just in some respects formalises what the RBNZ has been doing in recent times.

The difference of course is the addition of 'externals' - people from outside of the RBNZ on to that committee. Personally, while I think it's sensible to introduce outsiders, I also think it's right that the RBNZ insiders form the majority of that committee (four members to three outsiders). 

Again, however, to some extent judgement will have to be suspended till later and we see who gets appointed on to the committee as 'externals'. These people should be experts. And there would have to be concern about being able to find the right sort of people as small as this. It tends to be quite difficult to find people with the right skills who are independent and not in some way conflicted. 

I strongly feel there there's no room for politically correct appointments here, if that is contemplated. The quality of the debate around that committee table has got to be high and mustn't descend to the political or the petty.

The Acting RBNZ Governor of the past six months Grant Spencer expressed concern that putting 'externals' into the mix could produce a 'circus'. It is to be presumed he was most likely thinking of the US Federal Reserve when he said that.

In the US the views of the committee members are made known publicly and they can speak publicly on their views. That's never struck me as particularly helpful.

The New Zealand approach is to be that minutes will be released from the committee meetings, but the comments will be unattributed. Likewise the outcome of the votes will be known, but not attributed. And the RBNZ Governor will be the only spokesperson.

No leaks

Providing everybody sticks to that - and we don't start getting leaks - then it seems sound. I don't see any evidence that there is to be any review of how the new committee structure is going. I think that would be sensible, say after a year, so that fine-tuning could take place if necessary.

A diversity of views will be good. I certainly feel that some aspects of 'group think' came into the RBNZ's decision making during the term of Graeme Wheeler as Governor. There was an increasing sense of 'us and them' radiating from RBNZ staff.

On that theme, there were also signs at times within the past five years that the relationship between the RBNZ and the Government's finance arm The Treasury were strained - with again one sensed Treasury frustrated at the RBNZ acting unilaterally.

It's therefore of some interest that the Treasury will have a non-voting representative on this new committee. 

I can't imagine the RBNZ will be thrilled about this, but I think it's a good idea. The RBNZ and Treasury do have to work in co-operation and maintaining a good flow of information between the two should be helpful. 

Let's see what happens, but the changes as outlined so far look pretty good and are pretty sensible. 

No surprises

Here is hoping though that as we get into more detail with legislative changes we don't find some surprises.

The Reserve Bank Act is now nearly 30 years old. I am a big fan of the expression 'if it ain't broken don't fix it'. But the passage of time has an interesting way of not necessarily breaking things per se, but rendering them obsolete. I wouldn't call the Reserve Bank obsolete as such, but it should have been looked at before now.

One question that I hope is kept very much top of mind is on inflation itself. In the past the causes of inflation were reasonably well identified, so the progression of inflation could be reasonably predicted. Clearly that's no longer the case and you have to feel that the explosion of technology and the way that has forced prices down and allowed transferral of low prices around the globe is a big culprit.

A handle on inflation

If we are going to continue to base monetary policy around inflation targeting then we need to be sure we have a handle on how inflation is created in today's environment. I know the RBNZ has been putting a huge amount of work into that area.

I just hope that continues - and if there has to be modification in how inflation is measured and indeed target, that this can be considered.

And I would just like to say in signing off that I have found the stewardship of Grant Spencer as Acting Governor for the past six months very refreshing. Certainly I felt the press conferences he led were more informative and there was a feeling of greater openness about the communication coming from the RBNZ. 

It is to be imagined that Spencer was up for the Governor's job when it come up previously in 2012. He didn't get it.

If there was any sense within him in the past six months of wanting to prove before retiring that he could have done the job - well, for me, case proven.

Now all eyes are on Adrian Orr, with the expectation that with him in charge things will certainly not be dull.

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