Reserve Bank’s interest-rates processes under the spotlight

The Reserve Bank governor’s power over interest rate decisions will be reviewed, after years of denials by the National Government that this issue needed to be considered.

Former State Services Commissioner Iain Rennie has been appointed by Treasury to investigate both the Reserve Bank’s process for determining movements in the official cash rate (OCR), and whether the bank should be in charge of the legislation it operates under. The review was requested by Finance Minister Steven Joyce.

It comes at a time of growing political pressure to change the Reserve Bank structure, with Opposition finance spokesman Grant Robertson due to give a speech on the central bank’s model today.

Although Reserve Bank Governor Graeme Wheeler insists the decision over whether to raise or lower the OCR is made by committee, that process is voluntarily.

Almost uniquely for central banks anywhere, Wheeler and his predecessors have had the sole power over interest rates, which critics warn gives unrivalled power to an unelected official.

The OCR has a direct influence on how much interest Kiwi households pay on their mortgages, and the returns offered to savers.

The committee that Wheeler has appointed for OCR reviews – his two deputy governors and the assistant governor – is made up entirely of people who report to the governor, raising concerns about whether the decisionmaking process is rigorous.

Although Rennie’s review will only discuss the merits of a committee, confirmation of the review is likely to fuel debate about whether outside experts should be involved in the process.

The Bank of England’s interest rates decisions are made by a committee of experts mostly appointed by the chancellor of the exchequer – a role equivalent to New Zealand’s finance minister – while Australia’s board includes a number of experienced businesspeople.

Joyce, who said he expected Rennie to report back some time after May’s Budget, denied the Government’s position on the Reserve Bank structure had changed.

If any changes were to be contem- plated, a new governor to be appointed after the election would need to know what to expect.

National did not necessarily see the need to formalise the committee process used by Wheeler, as ‘‘effectively’’ this was how decisions were made.

Joyce said Rennie was not being asked to consider whether the decision should be made by a board of which the governor was simply a member.

The Green Party has already called for interest rate decisions to be made by a board.

Robertson said New Zealand’s model was out of step with central banking best practice.

‘‘We should be looking at a change in the decision-making model at the bank. We’re alone in the world in having a single decision-maker around the setting of the official cash rate,’’ he said.

‘‘Where you’ve got an organisation headed by an unelected official that makes such significant decisions, it’s best practice to have a wider group involved in the decision.’’

Michael Reddell, a former special adviser to the Reserve Bank who says he sat on a committee on OCR decisions for 20 years, said formalising the current structure would make only a marginal difference, as the members all reported to the governor.

‘‘If your pay and rations are determined by the governor, then the extent that you’re willing to stand up is questionable, particularly to a tyrannical governor,’’ Reddell said.

‘‘If the minister [of finance] were appointing the people on the committee, it would be a material step forward.’’

Rennie’s review will also investigate whether the Reserve Bank should manage the legislation it operates under.

Most ‘‘non-core’’ government agencies do not manage the legislation they operate under, with the Ministry of Business, Innovation and Employment, for example, setting the policy and regulation for the Financial Markets Authority.

However, the Reserve Bank does administer the various pieces of legislation under which it monitors financial stability.

Reddell said that meant when legislation was being reviewed, invariably officials would endorse existing policy.

‘‘Inevitably it leads to institutional capture. People are reviewing themselves.’’