Labour adds jobs to bank’s orders
Labour is promising to add ‘‘full employment’’ to the Reserve Bank’s aims, alongside its current price stability mandate, as part of a revamp of monetary policy if it wins power in September.
Finance spokesman Grant Robertson will not define what full employment means, other than that it is ‘‘most definitely’’ less than 5 per cent.
He would also maintain the central bank’s current 1-3 per cent inflation target but change the way the bank sets the official cash rate (OCR), moving away from the governor as a single decisionmaker to a committee of eight that included ‘‘some outside voices’’.
He said the bank made important decisions that affected what people paid on their mortgages and it should take account of a ‘‘range of perspectives’’.
It was also important to consider the broader health of the economy: ‘‘There are still 140,000 New Zealanders out of work, an unemployment rate of over 5 per cent. That’s too high.
‘‘Our goal should be that whoever can work, does work.’’
Robertson said full employment would be added to the provisions in the Reserve Bank Act, rather than by a change to the policy targets agreement between the bank governor and the finance minister. That would make it clear it was ‘‘not something that is the subject of negotiation’’.
The current law stipulates that the ‘‘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 bank has said it considers employment when setting the OCR, but Labour wanted to see employment ‘‘elevated’’, Robertson said.
The United States and Australia had commitments for full employ- ment in their central bank legislation.
‘‘The evidence is that those countries that have a dual mandate perform better, or as well as those with a single mandate, at managing inflation.’’
But, like the US, he would not give pre-eminence to either price stability or full employment. It would be a judgment applied at different times in the cycle.
As far as the OCR was concerned, moving from a single decision maker to a committee of eight would see three external appointments and a non-voting Treasury official.
The external members would be chosen in consultation with the finance minister, but the final say on the committee’s makeup would be left to the governor to preserve the bank’s independence.
Robertson said having the governor as a single decisionmaker was out of step with international practice, although he has a governance committee that includes the two deputy governors and the chief economist.
Labour also wanted the bank to publish the minutes of its meeting within three weeks, including the result of any vote, to boost transparency.
As well as those two specific changes, Labour would hold a review of the way the bank operated.
It would look at whether the consumer price index was measuring inflation well, and at the use of tools such as debt to income ratios (DTIs) on mortgages lending,.
The bank has sought per- mission to use DTIs but Finance Minister Steven Joyce has asked for more analysis of the costs and benefits.
Robertson is due to give details of Labour’s plan in a speech today.
He said since the Reserve Bank Act was passed in 1989 a lot had changed in the way the global and New Zealand economies operated.
The failure to meet inflation goals for the past four years had raised further questions. With a new governor to replace Graeme Wheeler after the September 23 election, it was ‘‘timely’’ to hold a review.
Meanwhile, after years denying such a move was needed Joyce on Friday confirmed a review of the governor’s power over interest rate decisions.
Former State Services Commissioner Iain Rennie has been appointed by Treasury to investigate the process for setting the official cash rate and whether the bank should be in charge of the legislation it operates under.