RBNZ could be in for a shakeup
New Zealand’s central bank may be facing the biggest shake-up to the way interest rates are decided since it pioneered inflation targeting three decades ago. The Labour Party, which has a chance of victory in an election that’s too close to call, wants the Reserve Bank to add full employment to its existing sole mandate of price stability. It also proposes policy be decided by a committee that would include external members, rather than the governor as lone decision maker. While adding employment would bring New Zealand into line with the Reserve Bank of Australia and the Federal Reserve, scrapping the sole focus on inflation adds to uncertainty brewing in markets about a potential new Government and its economic policies. The prospect of a new RBNZ chief being appointed in the next few months to succeed Graeme Wheeler is further fuelling the anxiety. “It will probably all come down to how the next permanent governor decides to interpret any changes,” said Paul Dales, chief Australia and New Zealand economist at Capital Economics in Sydney. “If Labour were to win and its policies weakened growth and inflation, then it would take even longer to satisfy a dual mandate. A growth-minded governor may be more inclined to keep interest rates lower for longer.”
A poll-of-polls compiled for Radio New Zealand has the two major parties neck-and-neck, with both able to form coalition Governments after post-election talks with smaller parties.
Wheeler’s term as RBNZ Governor ends on September 26 with deputy Grant Spencer in a caretaker role until the end of March.
After the election, the Finance Minister will make a permanent appointment based on the board’s recommendation.
A law passed in 1989, which came into force the following year, made price stability the RBNZ’s sole focus and the governor solely responsible for decisions.
Labour plans to review the Reserve Bank Act to ensure the central bank has a wider objective and would negotiate its agreement with the new governor on that basis, says finance spokesman Grant Robertson. It would retain the RBNZ’s independence and the existing 1-3 per cent inflation target.
“We wanted to be clear, in light of the fact that there was going to be a change in governorship, about some of the core elements of what we would like to see in the future,” he said. “I’m open to discussions about the exact wording.”
During Wheeler’s tenure, inflation spent eight straight quarters below 1 per cent and only once reached the 2 per cent midpoint he focused on. He was criticised for raising rates in 2014. Robertson said the governor “might have made a different decision” if he had had a wider set of objectives at that time. The RBNZ already takes unemployment into account when it sets policy so the change should not make a big difference, said Christian Hawkesby, head of fixed income and economics at Harbour Asset Management.
Still, “it creates an avenue for Labour to question and challenge the RBNZ as to whether they are making the right decisions”, he said.
Decision-making by a central bank committee is common-place around the world, and since 2013 Wheeler has used his two deputies and the assistant governor in a collective role on deciding key policy, while retaining a veto.
Robertson proposes expanding that committee by adding three independent experts, while a Treasury Department official would also participate without having a vote on the rate decision. Minutes and the voting record from each meeting would be published within three weeks.
“The four internal members are going to spend an awful lot of time convincing the other three,” said Stephen Toplis, head of research at Bank of New Zealand.
“It’s theoretically nice, but in practice it will probably make decision-making more slow and turgid. The job of the central bank is hard enough as it is.”
If a National-led Government is returned to power, Finance Minister Steven Joyce has said he’s open to formalising the existing committee structure but does not favour outside members.
“We should have a look at it,” Joyce said in July. “I wouldn’t see radical change. I think the Reserve Bank model serves us very well.”