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Jen​ée Tibshraeny on how the evolving relationship between the government and Reserve Bank will affect policymaking

Public Policy / analysis
Jen​ée Tibshraeny on how the evolving relationship between the government and Reserve Bank will affect policymaking

By Jen​ée Tibshraeny 

The trend we’ve seen over the past few years of governments playing significant roles in managing economies looks set to continue.

After decades of governments outsourcing economic problems to central banks, there was a move towards greater government involvement in these money matters pre-Covid.

The pandemic exacerbated that shift, as have the prominence of rising living costs and the distributional impacts of interest rate changes.

The swing isn’t necessarily ‘good’ or ‘bad’, but is worth noting.

It means we can’t assume that what happened in the past will necessarily happen in the future.

The change increases the risk of public opinion and electoral cycles disproportionately influencing policymaking. On the other hand, it creates space for more public involvement in policymaking.

Change coming from a revamp of the Reserve Bank Act 1989

Let’s rewind to 2017, when the Treasury started reviewing the three-decade old legislation under which the Reserve Bank (RBNZ) operates.

It took monetary policy decisions out of the hands of a governor and gave them to a committee with four internal and three external members and a Treasury observer.

It also added employment to the Committee’s inflation target. Those changes took effect in 2018.

The next phase of the review saw the Government in 2021 decide to make the RBNZ more accountable to it. From July, the Treasury will officially be made responsible for monitoring the RBNZ. Previously this was done by the RBNZ board. Under the change, the board will adopt a more hands-on governance role.

The new structure goes further in diluting the power of the governor.

While monetary policy decisions will firmly remain with the RBNZ, the Treasury will have more influence over financial policy, including how financial institutions are regulated and how credit is created.

QE saw RBNZ/govt relations intensify

In addition to legislative change, the RBNZ’s use of quantitative easing in response to Covid-19 saw fiscal and monetary policy work closely together.

The RBNZ launched its bond-buying, or Large-Scale Asset Purchase programme, because it didn’t have much room to keep loosening monetary conditions with the Official Cash Rate (OCR) nearing zero.

The programme saw it buy $53.5 billion of New Zealand Government Bonds on the secondary market.

The intervention helped the RBNZ by putting downward pressure on government bond yields and thus interest rates. It helped the Government by lowering its debt servicing costs and ensuring there was a buyer for the flurry of bonds it issued to cover Covid-related expenses.

The RBNZ plans to unwind the programme by selling down its bond holdings over five years from July.

The Government will once again be implicated. The indemnity it provided the RBNZ for the programme stipulates the Bank can only sell the bonds back to the Treasury. The requirement is there to avoid a sell-off by the RBNZ intervening with the Treasury’s bond issuance, potentially causing dysfunction in the market.

It’s likely Treasury will need to borrow more than it otherwise would’ve to get the cash it needs to buy bonds back from the RBNZ.

Distributional impacts

It’s no secret the loosening of monetary policy in the lead-up to, and during the initial stages of the pandemic, pumped up asset prices, which has had political consequences.

Finance Minister Grant Robertson came under so much pressure over the impact loose monetary policy was having on house prices, that he in 2021 he required the Monetary Policy Committee to start assessing the impact its decisions were having on house prices.

The RBNZ is also aware of the issues. It will consider whether it should put any weight on housing or the distributional impacts of its policymaking, in a five-yearly review it is doing on its monetary policy mandate.

Back to 2021, the Government also required the RBNZ to have regard for its housing policy in the way it does its job maintaining financial stability. The Government’s housing policy was defined as supporting more sustainable house prices, including by dampening investor demand for existing housing stock, and improving affordability for first-home buyers.

It's debatable how much influence these changes have had. The RBNZ recently put aside the Government’s desire to make it easier for aspiring first-home buyers to get a foot in the market, when it tightened loan-to-value ratio (LVR) restrictions to maintain financial stability.

Nonetheless, the changes have put the spotlight on the RBNZ and required it to better explain the impacts of its policymaking.

The key point is, the Government hasn’t held back trying to get the RBNZ to row in the same direction as it is on key policy fronts.

Higher interest rates will only do so much to curb inflation

So, the relationship between government and the RBNZ has evolved a lot since 2017.

The inflationary environment we’re in provides further reason to pay attention to the government’s role in policymaking.

The OCR is rightly on its way up, but there are limits to its effectiveness is curbing the type of inflation we’re facing.

While seismic amounts of fiscal and monetary stimulus provided in 2020 and 2021 have boosted economic demand, factors outside of New Zealand’s control are suppressing economic supply.

Russia’s invasion of Ukraine is raising oil prices and Covid-induced supply chain disruptions are increasing the cost of goods.

While the RBNZ lifting interest rates will stop the wealth effect in its tracks and reduce households’ disposable incomes, this will only go so far in dampening inflation.

Mountain of mortgage debt a handbrake

The enormous amount of mortgage debt New Zealanders have taken out since the start of the pandemic might also restrict the RBNZ from hiking the OCR too aggressively.

Households will be fine on aggregate, but those at the margins – including recent first-home buyers with large mortgages – will feel the pain.

What’s more, it’s difficult to know how much further consumer confidence will fall should mortgage rates keep climbing and house prices fall - as expected.  

A high inflation/slow economic growth combo is a very real prospect.

Inflation now the hottest political issue

While inflation is technically the RBNZ’s problem, “the cost-of-living crisis” has become a political problem for the Government.

The Opposition has zeroed in on the issue since the end of last year. Poll results suggest this is working.

There are of course things the government could do to alleviate domestically-driven cost pressures – ensure housing supply is keeping up with demand, make the building supplies and supermarket sectors more competitive, and ensure government spending is targeted.

But, because the Government can’t stop Russia from invading Ukraine, or China from responding to Covid outbreaks with lockdowns, the focus is being put on what can be done to alleviate the pain of inflation.

Going into next year’s election, much of the debate will centre on how broad or targeted this support should be. Broad-based support, in the form of income or fuel tax cuts for example, will be popular. 

Targeting support is more progressive and prevents it from exacerbating inflation. However, this can be a harder sell, especially for politicians eyeing the coveted “middle New Zealander”.

The Government knows this. Last week, Prime Minister Jacinda Ardern offered a couple of journalists rare one-on-one interviews to talk through welfare changes, announced at Budget last year, which have just taken effect.

Moral hazard

So, in summary, the nature of the inflationary environment we’re in, as well as changes to the Reserve Bank Act, tweaks to the RBNZ’s remit and the use of quantitative easing have brought the government and central bank closer together.

The landscape has changed, but have we?

The moral hazard created by the government and RBNZ response to Covid-19 is huge. One might have been led to make risky investments with the understanding that when the next crisis comes along, policymakers will once again slash interest rates and loosen credit conditions, rolling out the red carpet for asset owners.

While this is a logical approach, given the size of the housing market and banking sector in the context of the New Zealand economy, one can’t be 100% certain history will repeat.

Furthermore, it will be harder to slash interest rates to lift economic demand should inflation become embedded.

The same could be said for the loosening of credit conditions. While credit creation has soared in recent years, economic output hasn’t to the same extent.

Political layer

So, if governments are less able to outsource economic management to central banks, how will this affect policymaking?

Decision-making could become more driven by public opinion and electoral cycles. This could promote short-termism and create uncertainty.

On the upside, politicians will have to be more mindful than the RBNZ of the distributional impacts of policies. The RBNZ isn’t specifically required to consider how using blunt tools, like the OCR, affect different parts of society. But the government has more levers at its disposal to target/refine policymaking.

The RBNZ will also be more accountable for its actions, alongside democratically-elected members of parliament.

Finally, more government involvement creates more space for public participation.

The onus is therefore on us to push politicians to create forward-looking policies that will serve us well across electoral cycles.  

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"The onus is therefore on us to push politicians to create forward-looking policies that will serve us well across electoral cycles."

I feel like this is a bit unfair to the average voter. In multiple elections spanning decades, voters have elected parties based on housing, taxation and super reform, only for those parties to then disown those policies once in power in order to keep it. The campaign promises made in 2017 were a particularly cynical example of this in action. 

In reality, there is little the average voter can do if parties choose to eschew the mandates they campaigned for votes on and pursue ideology-based agendas instead; National's migration levels and Labour's co-governance approach both shows governments who prioritised things they weren't elected to do over things they were elected to do. At this point, arguably democracy has failed voters, who have no powers of recall. Even the age of Ministerial Accountability seems to be over. I struggle to see what more voters can actually do anymore.


The age of ministerial accountability was restructured out of Central Govt politics by the politicians themselves in the SOE & State Sector Acts over 30 years ago. Now they're making similar undemocratic & unaccountability changes to local Govt. Legislation.


Excellent point. I voted for John Key on the same basis, and ended up incredibly disappointed in his about face on the housing crisis and going completely silent on the productivity problem.

As long as the major parties only talk about these things while refusing to tackle the core problems - the belief that house prices are only allowed to go up, living it up by passing debt to the next generations is good, and only productive working folk should be taxed - neither of them will do anything of much consequence or use.


The problem with having so much centrism in democracy is that resolving most burning issues will upset a percentage of your voter base if you actually address them properly.

Really, there needs to be a voter derived political opposition to National and Labour.


GV 27,

Sadly, you sum up the democratic deficit all too well. What can we do as individual voters? Much as I don't like ACT, perhaps we need a minor party like them to get enough votes to have real influence; to shake things up.

I have voted Green at the last 2 elections, but I now dread the possibility of a green/labour coalition next time round. On the evidence to date, they would drag this country far too far to the left for my liking. But hey, if that's what enough voters want........


We should have been co-governed since the treaty was signed, there is no way putting that to rights should be left to the tyranny of the majority, it just has to be done. Wry smile at the comment about democracy not serving, well, best you go ask Maori how it's worked for them.


"Households will be fine on aggregate, but those at the margins – including recent first-home buyers with large mortgages – will feel the pain."

Bold call....unfortunately the aggregate is the sum of the margins, the aggregate is not immune.


Healthcare, utilities, and now the central bank. This government certainly is determined to bring everything under central control.


This is little choice - costs imposed by the FIRE industry preclude indispensable household spending elsewhere.

Neoliberalism impoverishes. Neoliberalism is a class war against labour by finance, primarily, and a class war against industry. A class war against governments. It’s the financial class really against the whole rest of society seeking to use debt leverage to control companies, countries, families and individuals by debt. And the question is, are they really going to be able to convince people that the way to get rich is to go into debt? Or are other countries going to say, this is a blind alley. And it’s been a blind alley really since Rome that bequeathed all the pro creditor debt laws to western civilization that were utterly different from those of the near east, where civilization took off. Link

Rents are continuing to rise in the US. According to, February 2022 was the seventh month in a row with a double digit increase in rent prices from the year prior. Rents in February were 17.1% higher than in February 2021. The median rent in the 50 largest metro areas has risen to $1792 a month.

This is why the United States cannot industrialize as long as the house prices absorb this high a rate of income, and as long as the banking sector is supporting this, and as long as the political parties say we will not tax real estate so that all of the rising land value will be able to be pledged to banks to pay interest instead of to pay taxes. Essentially, it’s the (lack of) taxing of real estate in the United States that has subsidized the increase in housing prices, because housing prices are worth whatever a bank will lend to buy a house. If you have to go to a bank, and if they lend more and more and this money isn’t taxed away, the price is going to go up. So you have the government policy, the bank policy, all trying to promote this high diversion of income into paying land rent. Again, this is the exact opposite of what Adam Smith and John Stuart Mill and classical economics and the whole 19th century had advocated. This has priced American labor and industry out of world markets.

If you have to pay 43 percent of your income for rent, then even if the government were to give you all of your goods and services for nothing, all of your food, all of your clothing, all of your transportation for nothing, you’d still have to pay so much money for rent and for health care that you couldn’t compete with labor in Asia or the Third World or even Europe. And so this is what has essentially excluded the United States from having a successful empire. It’s the greed of the financial sector, basically, and the takeover of the government by the financial sector here as happened under Margaret Thatcher in England and then Tony Blair. You’ve had both countries essentially enter permanent austerity programs, and the only way to cure this is for housing prices to go down. But if the housing prices go down, then the banks will go broke. That’s why Obama said he had to support the banks: because if he’d actually lowered the housing prices to realistic levels, that would enable America to survive, but the banks would go under. Until you’re willing to restructure the banking system, you’re not going to be able to industrialise the American economy.  - Link


to be fair the state of drinking water, sewerage and storm water management by incompetent councils requires centralisation...the reserve bank would only play into the hands of those with assets so needs to be directed...the absurd inequities in health provision desperately needs to be reconfigured...

labour tried to get schools centralised to undo the tragic unfairness of tomorrows school but were shut down by grammar zone-ists. In a tiny space and population like NZ I would think centralisation is an obvious necessity


“the cost-of-living crisis” has become a political problem for the Government

Indeed - so we end up with...

  1. Govt trying to reduce the cost of living through fuel discounts, half price public transport, and taking action (I wish) to tackle abusive market power / duopolies
  2. RBNZ trying to increase the cost of living by hiking interest rates in the mistaken hope that higher borrowing costs will reduce the price of oil, wheat, etc 

Is this what closer working between RBNZ and Treasury looks like?!?    


Point 2 isn't entirely correct (in my opinion)....perhaps true in the short term...

But by dropping rates to zero....has the resulting outcome been that the cost of living has reduced? (no...people have just added more debt to their lives with resulting higher asset prices...) So therefore how do you deduct the opposite is also true that raising rates will increase the cost of living?

Dropping rates only improved the lives of asset owners....and that is a reducing part of society as wealth has been transferred from non-asset owners to asset owners. I think you find that increasing rates will yes increase the cost of living for asset owners (mortgage payments etc)....but that is because they've had a free ride recently and it has been the non-asset owners carrying the rising cost of living for them....landlords can try and increase rents to cover their losses..but you can only extract so much income from renters before there is nothing left to take (and the more they try to take...the more inflation that will be measured, and the more that central banks will raise rates in response - either that or we have widespread debt defaults as a result of a deflationary bust).


As ever, if someone is paying more, someone is getting more, if someone has larger debts, someone has larger assets. So when rates increase, some people win and some people lose, and vice versa. I would not claim to understand who exactly is a net winner or loser as rates go up and down - mainly because I have worked on enough complex systems to know that people who claim to understand how they work is generally talking out of their proverbial. What I would say though is that the same group of people seem to win whichever way the interest rate wind blows.

My point above is that RBNZ's intent in increasing interest rates is to reduce the disposable income of mortgage-paying households (thus increasing the cost of living), increase the costs of business expansion, drop demand in in the economy, and increase unemployment enough to suppress wages and prevent a wage / price spiral. This is diametrically opposed to what Govt is trying to do. As noted below - this is macroeconomically stupid. 


What it is, as you know well, is the 'government' having an existential macroeconomic identity crisis: all it's ever known is that the #independent central bank is meant to wield its godstick and find that gosh-darned NAIRU and tame inflation. Never mind the fact that dialling the OCR up and down will do sweet jack-all to the war in Ukraine, the backlog of container ships, and the myriad other impediments to the spindly, fragmented global supply chains we rely on.


Is this what closer working between RBNZ and Treasury looks like?!?    

This is what bad macroeconomics looks like.


Oh how the Pendulum swings !

If I have dropped something can you please help me find it .


Did you drop 30%?


Not to mention 7%(guaranteed)


lowercase capitalist -  I should pay you a Finders Fee.  Thanks for that.




Did you mean - 30% ?


Dropping -30% is a double negative, i.e. an increase of 30%



"Finance Minister Grant Robertson came under so much pressure over the impact loose monetary policy was having on house prices, that he in 2021 he required the Monetary Policy Committee to start assessing the impact its decisions were having on house prices."


This right here is a big issue and it's only going to get worse. Prepare for monetary policy to be heavily politicised.