Top economist says the Reserve Bank should make the Monetary Policy Committee votes public and consider lifting the inflation target range to between 2% and 3%

Westpac NZ’s chief economist, Kelly Eckhold says the next Reserve Bank (RBNZ) Governor should consider changing the inflation target to focus on a 2.5% midpoint and making Monetary Policy Committee (MPC) votes public.

In a note published on Friday, the former International Monetary Fund expert described reforms an incoming RBNZ governor could consider to improve transparency and policy. 

Most of these suggestions were focused on communication, such as holding press conferences after every policy meeting and encouraging MPC members to give speeches. 

However, some suggestions were more radical. These included making MPC votes public after each decision, holding an extra meeting each year, and lifting the inflation target to 2.5%. The existing target range is between 1% and 3% with a focus on the midpoint.

Eckhold said raising the inflation target range to between 2% and 3% would align New Zealand’s policy with the Australian target, and better match historical inflation averages.

“Over the past two decades, the RBNZ has struggled to consistently achieve its target. Inflation has averaged around 2.6% over the last 25 years — although CPI [Consumers Price Index] inflation has been above and below 2% around 50% of the time,” he said.  

This is because the  inflation rate occasionally spikes well above 2% but it very rarely drops significantly below that target, pushing the average up over time.

“A 2.5% inflation target might better match New Zealand’s historical capacity to deliver price stability and bring expectations closer to reality.” 

The Minister of Finance sets the inflation target, in consultation with the RBNZ board and MPC, in her monetary policy remit. While it would be a significant policy shift, it would be a relatively easy change to implement from an administration perspective. 

Eckhold said the MPC would need to increase its focus on maintaining the 2.5% midpoint, if the target range was increased, to avoid the average inflation rate drifting toward 3%. 

This is a common argument against revising inflation targets. Critics worry the target will repeatedly ratchet higher and the public will expect a steady increase in the inflation rate.

Michael Reddell, a former central banker and prominent economic critic, said he was opposed to raising the target, and actually saw a stronger argument for lowering it. 

Eric Crampton, an economist at the New Zealand Initiative, said raising the target would likely result in a corresponding increase in long-term average inflation rates. 

“The best way of anchoring expectations is by achieving the target, not by lifting the target to meet expectations that can shift with the target,” he said in an email. 

However, Kiwibank chief economist Jarrod Kerr said he’d like to see a higher inflation target that moves the average further away from zero. 

Some argue a higher target gives central banks more room to cut interest rates in downturns, makes wage and price adjustments easier, and reduces the burden of high debts.

However, one economist with central banking experience described it as “a stupid idea” and “ludicrous in the extreme” considering people were already furious about the cost of living. 

Reddell said instead of raising the target to make room for interest rate cuts, central banks could prepare to use negative interest rates to combat a severe downturn.

A little more conversation 

Publishing more information about individual Monetary Policy Committee members’ views on policy decisions is another change some economists advocate for. 

Eckhold wrote in his note that the MPC ought to vote on all policy decisions. Currently, the seven committee members try to find consensus and only hold a vote if they are unable.

“This lack of regular, publicised voting means market participants and the public are often left to infer the preferences and convictions of committee members from sometimes ambiguous meeting summaries,” he said.

Technically, the members are able to reveal how they voted but have historically been discouraged from doing so. Most external members have never even given a public speech or a media interview. 

RBNZ communications staff once intervened to prevent former member Caroline Saunders from giving an interview to Interest.co.nz. This was due to the specific timing, which was chosen by Saunders, but it was never rescheduled.

Peter Harris, another former member, only agreed to do an interview once he had left the committee. Even then, he said was unable to talk about any specific policy decisions.

Long-serving member Bob Buckle has given one public economics speech, although it was partly in his capacity as a professor at Victoria University of Wellington. 

Prasanna Gai, a recent addition to the committee, gave a private speech to the Auckland Chamber of Commerce this year but the media were not permitted to attend.

Many economists and central bank commentators would like to see more public disclosure of individual committee members' views, similar to the US Federal Reserve system. 

The Bank of England, the Bank of Japan, and Sweden’s Riksbank also conduct formal votes, whereas The Bank of Canada, the Reserve Bank of Australia, and the European Central Bank usually do not.

Eckhold said regular, publicised votes and an explanation of each member’s rationale at every meeting would “significantly enhance the transparency of the RBNZ’s decision-making”. 

Under the RBNZ’s current charter, those votes would have to be unattributed. But a new governor and the Minister of Finance could go one step further and have members disclose their positions.

“Currently, the anonymity of committee members' votes may be intended to foster frank debate and shield members from external pressure. However, international experience suggests that publicizing individual votes can strengthen institutional credibility and foster more robust policy debate,” he said. 

Other economists we spoke with were generally supportive of more committee disclosure, although perhaps not disclosing votes by name. 

Arthur Grimes, a former RBNZ board chair and chief economist, said he was agnostic about making votes public. 

“Doing so may increase accountability but quite possibly at the cost of frankness within the committee — probably on balance a slight no,” he said in an email.

Kiwibank’s Jarrod Kerr said it would be interesting to see specific votes and NZ Initiative's Eric Crampton said there was value in knowing how the committee reached their conclusions.

But increasing disclosure is possible without making votes public. Eckhold also suggested publishing individual members’ views on the biggest risks to the central forecast. 

“Publishing some of this information would be valuable. It would enable markets and the public to identify the most salient areas of perceived risk around the forecasts, enhancing their ability to anticipate changes in the MPC’s thinking and reducing the likelihood of unexpected policy shifts,” he said. 

Michael Reddell suggested the RBNZ’s staff papers provided to the MPC should be released a month or so after each meeting. This would show the quality and depth of the analysis and advice the committee was using to make its decisions. 

This would be similar to how the Treasury proactively releases most of its Budget advice and documents three or four months after it is delivered in Parliament.