Limits for Reserve Bank
Speech in Sydney outlines new targets
The Reserve Bank of New Zealand may now need to give regard to employment when setting monetary policy but in reality its ability to influence trends in the jobs market is limited, says Reserve Bank assistant governor John McDermott.
Last month Finance Minister Grant Robertson and new governor Adrian Orr signed a new policy targets agreement (PTA) that adds the goal of “supporting maximum levels of sustainable employment within the economy” to the existing goal of price stability, and the government announced a switch to decisions by committee. In a speech delivered by McDermott in Sydney yesterday, he said the employment mandate would “reinforce the flexibility of inflation targeting” because the bank already assessed employment in judging the impact of policy on the economy.
Monetary policy had become increasingly flexible as it has evolved since the Reserve Bank Act (1989) and that meant “we have long had regard to the real economy, including employment,” he said in a speech to a Reserve Bank of Australia conference, titled: Inflation targeting in New Zealand: an experience in evolution.
While the PTA has been signed, the exact wording of the full employment objective in the Act is yet to be determined. McDermott said the lack of a numerical target for full employment in the PTA was “helpful, as maximum sustainable employment cannot be fully captured by a single indicator.”
“Just as with inflation, our understanding of the labour market can always be improved as we are faced with new data, new developments, and as new research methods become available,” McDermott said. Still, “there are widely-recognised limits to what monetary policy can do over the long run. We have some influence over the degree to which the unemployment rate, as just one example, deviates from its underlying trend.”
McDermott said that “ultimately that underlying trend is determined by factors outside of our ability to
There are widelyrecognised limits to what monetary policy can do over the long run. We have some influence over the degree to which the unemployment rate, as just one example, deviates from its underlying trend. Reserve Bank assistant governor John McDermott
influence, that rely instead upon the age and skills of the population, the efficiency with which jobs are matched to available workers, and the nature of employment regulation”.
Under the government’s planned changes to monetary policy processes, a charter will be agreed between Robertson and the yet-to-be-formed new monetary policy committee (MPC) within the bank. The charter will set “out the approach to issues defined in the Act, including the approach to communications”.
While the charter is in the future, Robertson has said the aim is “to reach decisions by consensus, and for non-attributed votes to be published where there is not consensus”, McDermott said. “The minister also intends for non-attributed records of meetings to be published that reflect any differences of view among the MPC. We will no doubt explain these and other changes — and their potential implications for the setting and communicating of policy — as they are finalised.”
Publishing the minutes of the MPC meetings will bring New Zealand into step with other central banks including the Federal Reserve and the Australian central bank.
Decision-making by committee “does not guarantee superior outcomes”, McDermott said. “How the MPC will operate in practice is also extremely important. Committees are more successful when they have processes in place that aim to minimise various human biases, such as the pressure to conform, confirmation bias, and a tendency to rely on the most recent events to a greater extent than is sometimes warranted.
“The bank will continue to ensure our internal processes aim to maximise the benefits that committees can provide,” he said.
The government last month announced the changes under phase 1 of its review of the Reserve Bank Act. Phase 2 of the review of the Act is still being developed to include the bank’s financial stability role and broader governance reform. —