Labour’s stance that the Reserve Bank of New Zealand’s (RBNZ) price stability goal should be accompanied by a focus on employment will not see it propose a specific, nominal employment or unemployment figure for the central bank to target, finance spokesman Grant Robertson told interest.co.nz.
Meanwhile, Labour is set to follow the US example of not outlining which of price stability or employment the central bank should prioritise if the two goals were to clash at any point, he said.
Robertson is gearing up to provide further detail in coming months on his calls for the RBNZ’s targets to include employment. As reported, he has pointed to language used by the Reserve Bank of Australia (RBA) and the US Federal Reserve (Fed) as indicative of where Labour wants to head.
If Labour leads the government after the 23 September general election, it will immediately launch a review into its proposals. This will also include a look at a Labour preference of taking sole rate-setting responsibility from the RBNZ Governor in favour of a rate-setting board that includes the Governor, his deputies and potentially other voices within the bank.
The RBNZ’s governing legislation is the Reserve Bank Act 1989. The Act stipulates that “(t)he primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices.”
The legislation gives the RBNZ its independence from the government. However, there is some contact: each RBNZ Governor enters an agreement with the Minister of Finance detailing “…policy targets for the carrying out by the Bank of its primary function during that person’s term of office, or next term of office…”. These are referred to as Policy Targets Agreements (PTAs). Targets have to date been mostly measured by annual changes in CPI inflation.
RBA and Fed language
Both the RBA and the Fed have specific price stability goals like the RBNZ, while also being tasked to take employment outcomes into consideration when setting policy. Neither have specific, nominal employment or unemployment targets.
The RBA has a duty to maintain price stability, full employment, and the economic prosperity and welfare of the Australian people. The Fed is tasked by Congress to target maximum employment, stable prices, and moderate long-term interest rates.
The RBNZ does of course take employment settings into account as part of its policy making process. But, not expressly having a reference to it in its governing legislation can help in the event price stability and employment outcomes are in conflict.
Robertson accepts this is a fair point. He told interest.co.nz that Labour is not going to tell the RBNZ whether one is more important than the other. For the type of language we might see around this, we can possibly turn to the Fed:
under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.
The Fed legislation accepts that factors affecting the maximum level of employment might not be directly measurable; this is why it does not have a fixed employment target. But, Fed members are asked to assess what they think is the normal rate of long-run unemployment, which the central bank does publish, for example, a range of 4.5% to 5%.
We’ve been there before
Having the Reserve Bank target employment outcomes as well as price stability is nothing unheard of in New Zealand. Previous versions of the Reserve Bank Act and recent PTAs have referenced employment outcomes. For readers keen on a quick-fire history of monetary policy in this country, see this 2012 paper from the RBNZ.
Employment language in the Act:
The 1949 election-winning National government amended the Reserve Bank Act 1933 to include references to both price stability and employment goals (along with trade and production considerations) in 1950:
[The Bank] shall do all such things within the limits of its powers as it deems necessary or desirable to promote and safeguard a stable internal price level and the highest degree of production, trade, and employment that can be achieved by monetary action (1950, s2)
The 2012 RBNZ discussion paper by James Graham and Christie Smith noted that reference to the goals other than price stability ‘were not absolute but were to be pursued only to “the highest degree…that can be achieved by monetary action”.’
Up until that point the Bank was tasked with regulating and controlling currency and credit in New Zealand, while keeping an eye on promoting and maintaining NZ’s economic and social welfare.
The 1950 alteration was changed again in 1969, with the Labour government of the time amending the Act:
The Minister of Finance may from time to time communicate to the Reserve Bank the monetary policy of the Government, which shall be directed to the maintenance and promotion of economic and social welfare in New Zealand having regard to the desirability of promoting the highest degree of production, trade, and employment and of maintaining a stable internal price level (1960, s2).
Graham and Smith note that internal price stability had been demoted to the bottom of the government’s monetary policy objectives with the 1960 change.
Various modifications to the Act after this generally focussed on the relationship between the Bank, the Minister of Finance and Parliament. That was until the 1984 Labour government embarked on a wholesale review of the Act. One paragraph from Graham and Smith’s paper highlights the drivers for this (emphasis added):
New Zealand’s terms of trade fell sharply after 1973, and macroeconomic policy faced major adjustment challenges through the following years. Large fiscal deficits, gradually rising unemployment, low productivity growth and the adjustment costs of various microeconomic reforms, all made it more difficult to secure support for the necessary measures to keep inflation low. Headline inflation would remain above 10 percent for most of 1974- 87 (with a brief interruption associated with the wage and price freeze in 1982-84), and for much of the 1970s and early 1980s the policy emphasis on stemming the rise in unemployment limited the extent to which interest rates were allowed to rise. The government and much of the private sector borrowed at very low or negative real interest rates, complicating efforts to keep inflation in check.
The 1989 Act focussed the Bank’s primary responsibility on price stability. It also introduced the Policy Targets Agreements as we know them today for the carrying out of that primary function.
Employment references in PTAs
The removal of an employment goal from the Bank’s objectives in the 1989 Act, and the stated primary focus of the Bank being price stability, did not stop employment being referred to in PTAs between the Governor and Minister of Finance.
However, a quick look through the various agreements signed since 1990 shows the emphasis on employment outcomes has been in relation to the government’s economic policy. The stance taken by successive governments since 1990 has been that the Bank can best aid the government in its employment and other goals by maintaining price stability.
The very first PTA between Labour’s David Caygill and Don Brash in March 1990 was firmly focussed on inflation, requiring the RBNZ to achieve price stability – an annual rate of 0-2% - by December 1992. The change in government in 1990 saw National’s Ruth Richardson negotiate a similar agreement with Brash later that year and again in 1992.
When Bill Birch became Finance Minister, his 1996 PTA with Brash was the first to refer to employment:
Consistent with section 8 of the Act and with the provisions of this agreement, the Reserve Bank shall formulate and implement monetary policy with the intention of maintaining a stable general level of prices, so that monetary policy can make its maximum contribution to sustainable economic growth, employment and development opportunities within the New Zealand economy.
Cullen’s 2002 and 2007 PTAs with Alan Bollard introduced a slight change. They were much more specific that the RBNZ’s goal was price stability. They included a second clause outlining that the objectives of the government’s economic policy:
a) Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices
b) The objective of the Government's economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives.
a) Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices.
b) The Government's economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders. Price stability plays an important part in supporting this objective.
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