The coalition government has passed a bill removing the maximum sustainable employment objective from the legislation governing the Reserve Bank (RBNZ).
The RBNZ will now legally pursue one main economic objective: “achieving and maintaining stability in the general level of prices over the medium term”.
It will retain its financial stability objective and other central bank functions, but the economic objective of “supporting maximum sustainable employment” has been removed from the Act.
This vote reverses a change made by Labour in 2019, alongside other Reserve Bank reforms.
Finance Minister Nicola Willis, who introduced the bill, said removing the dual mandate was a “highly symbolic and important act” that would help to fix the cost of living crisis.
She also seemed to suggest the dual mandate was responsible for the recent bout of inflation.
“When the dual mandate was added in 2019 it undid success in the past and, as we've seen, inflation in recent years has been consistently well above the Reserve Bank's target…”
There is no evidence the RBNZ’s employment objective contributed to inflation, which was triggered by a supply shock that occurred during the covid-19 pandemic.
However, the Treasury advised that removing the employment mandate could improve public perception of the bank and therefore inflation expectations.
Chlöe Swarbrick, a Green Party MP, said the bill was “virtue signalling” since it would make “absolutely no difference whatsoever” to how the RBNZ set its monetary policy.
Grant Robertson, Labour’s finance spokesperson, said it was an “unnecessary, short-sighted bill” that would worsen the overall economic well being of New Zealanders.
Speaking after the vote, Willis told reporters she was “delighted” to have passed her first bill as Minister of Finance.
“I think this bill sends a very clear message about our government's war on inflation. And we're very pleased that the Reserve Bank now has a clear single mandate to bust inflation”.
She said it could be considered a successful law change if it helps to build confidence in the central bank’s focus on bringing down inflation.
Coalition politics
National’s coalition partner, New Zealand First, has previously been supportive of having the central bank pursue wider economic goals. The party voted in favour of Labour's reforms in 2018.
In 2012, party leader Winston Peters put forward a members bill which would have added export growth and employment to the RBNZ’s remit.
This would have fixed “fundamental flaws” in the Act, including the “myopic focus on price stability, to the exclusion of other critical economic indicators”.
NZ First, as part of the coalition government, voted in favour of the bill passed on Wednesday but did not give any speeches in support.
Willis told Parliament that returning to a single mandate would not require the Monetary Policy Committee to “discount the impacts of monetary policy on the real economy”.
The Act Party was highly supportive of limiting the RBNZ’s remit and wanted the coalition government to make further changes to its governance.
Some of Willis’ comments in Parliament during the debate did not sound promising for other suggestions included in the coalition agreement between National and Act.
One of these was to set a specific time limit for the RBNZ to get inflation back on target. However, Willis committed to retaining the flexible target during the debate.
“I want to assure the member, Chlöe Swarbrick, that we will retain the flexible inflation targeting regime under which the response of the Reserve Bank to inflation is tempered by considering the impact on other factors in the real economy,” she said.
Elsewhere in the debate, Willis said: “Flexible inflation targeting, whereby the Monetary Policy Committee has regard to the impact of monetary policy on the broader economy when determining how quickly to return inflation to target has been central to New Zealand's successful inflation targeting regime for many years”.
The finance minister also said she would publish a revised remit and charter for the RBNZ, which reflected the change in legislation and retained the flexible target.
29 Comments
Don't confuse artificial keystroking with 'tools'.
The latter are real.
And inflation, henceforth, is due to ultimate scarcity. We are into the last 'doubling time' of them all, in terms of the physical planet (and this Government is showing us that it cannot do without the physical world). Shane Jones' nonsense talk tells us this; when you're down to eyeing-off the Doc-administered acreage, you know there isn't a 'doubling' left. We're into desperately-grasping-at-dregs territory - and the dregs are going to be exponentially-more contested, as time moves on.
Inflation? We haven't seen the half of it. But interest-rates, of course, have to match the fact that we're over the growth hump and heading down the other side; so THEY should be negative (the disparity between what they should be, and are, is the increasing debt bubble). So that 'tool' is fatally compromised.
I doubt Willis has the first idea about the fact that we're hitting the Limits to Growth - nor Orr. Economics is energy/resource blind; so by inference, are they.
This will all end ........
Yes if this had been in place 12 months ago, the OCR would have been 6.5. In the short term there is now a 50/50 chance of another rise of the OCR. However I believe the RBNZ will remain professionally independant, but note the change. If the next governor is appointed and National still in power (they are looking like a one term government at present) the appointment will be highly scrutinized.
That comment is as curtailed as the target.
The problem is specialization - siloing of teaching disciplines. What is needed, is Generalists - overview or Systems-thinkers. She has as much chance as anyone else, of being one of those - perhaps more than any economics-trained vassal.
But she clearly isn't.
Thank you for that deep, meaningful, thought-provoking post.
With a bias like that you maybe should have taken up sewing?
Both types - what the shallow-spanning media calls left and right - are wrong; both assume GROWTH.
That's an order-of-magnitude bigger predicament than any distance between them.
Good stuff.
The task of a Reserve Bank is to control inflation and monitor and preserve the overall integrity of the financial system.
The employment mandate should have never been part of the RBNZ remit in the first place. Control and management of the employment level is something that the government should worry about, not the Reserve Bank.
This also means that, in the future, the RBNZ will not be able to use the employment mandate excuse, to impose recklessly ultra-loose monetary policies as they have done in the last few years.
This means that rates will stay at current levels until inflation is convincingly and sustainably under the 2-3% target, something which is going to take until the 2025 at the very least - and even this might turn out to be optimistic.
It will make no difference whatsoever. The only time the RBNZ would have even considered the employment mandate is when inflation was well and truly under control, and even then the employment mandate has always been inferred, of course they are going to do what’s best for the economy if inflation is under control.
If the RBNZ is trying to juggle employment right now, and tomorrow they don’t have to worry about it, shouldn’t we expect a rate rise at the next review? I doubt we’ll get one.
I do not think this will change anything at RBNZ, it may have "cooled the jets" during covid... but it's too late now. he has set mortgages at a level few are willing to buy into, hence such low sales rates (in April 23 the 12 month trailing sales numbers where the lowest in 40 years) and he last put OCR up in may... job done, only idiots are now taking on more debt....
The Spruikers are clutching at sinking green shoots, this sucker is going down.
Dodged a bullet getting out of Glendowie....
CoreLogic reveals
These areas experienced drops in value over the last 12 months:
- Featherston -16.0 percent
- Marton -15.3 percent
- Raumanga (Whangarei) -13.4 percent
- Glendowie (Auckland) -13.0 percent
- Ostend (Auckland) -12.8 percent
- Petone -12.8 percent
- Karaka Bays (Wellington) -12.5 percent
- Martinborough -12.5 percent
- Matakana (Auckland) -12.4 percent
- Pahiatua -12.4 percent
If the employment target had not been in place in the last year or two, then more unsustainable businesses would have tanked and more low productivity jobs cut already negating the demand for lower skilled labour and thus reducing the huge levels of immigration we currently have Unfortunately there is a huge hole we have to dig ourselves out of if we are to ever increase productivity and GDP per capita.
It's hard to imagine what positive outcome they expect this to deliver...just adds the potential for higher unemployment into the immigration mess. Even as inflation continues to cool the damage will be so much more than the stats imply although unevenly distributed as always. Look for youth, Maori and Pacifica to bear the load.
What does this tell us? Hold onto your jobs folks, and make yourself valuable before the company downsizes. Try asking for a large payrise?? Well well well they will just take someone who will work for less. Back to the days of 2009-2010 with hundreds of applications per job when unemployment ticks up. Merry Christmas NZ, we can enjoy our underfunded infrastructure and overpriced rent, housing and food courtesy of old double-salary Orr.
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