The New Zealand Labour-led Government’s review of the Reserve Bank Act has broadened the Reserve Bank of New Zealand’s (RBNZ) mandate on setting the official cash rate (OCR) to target the “maximum sustainable level of employment” as well as price stability (inflation). It has also established a seven-member committee to set the OCR. Here’s the key extracts from the RBNZ release:
The agreement continues the requirement for the Reserve Bank to keep future annual CPI inflation between 1 and 3 percent over the medium-term, with a focus on keeping future inflation near the 2 percent mid-point.
The new PTA now also requires monetary policy to be conducted so that it contributes to supporting maximum levels of sustainable employment within the economy.
The new focus on employment outcomes is an outcome of Phase 1 of the Review of the Reserve Bank Act 1989, which the Coalition Government announced in November 2017.
“The Reserve Bank Act is nearly 30 years old. While the single focus on price stability has generally served New Zealand well, there have been significant changes to the New Zealand economy and to monetary policy practices since it was enacted,” Grant Robertson said.
“The importance of monetary policy as a tool to support the real, productive, economy has been evolving and will be recognised in New Zealand law by adding employment outcomes alongside price stability as a dual mandate for the Reserve Bank, as seen in countries like the United States, Australia and Norway
“Work on legislation to codify a dual mandate is underway. In the meantime, the new PTA will ensure the conduct of monetary policy in maintaining price stability will also contribute to employment outcomes”…
“Currently, the Governor of the Reserve Bank has sole authority for monetary policy decisions under the Act. While clear institutional accountability was important for establishing the credibility of the inflation-targeting system when the Act was introduced, there has been greater recognition in recent decades of the benefits of committee decision-making structures,” Grant Robertson said.
“In practice, the Reserve Bank’s decision-making practices for monetary policy have adapted to reflect this, with an internal Governing Committee collectively making decisions on monetary policy. However, the Act has not been updated accordingly.”
The Government has agreed a range of five to seven voting members for a Monetary Policy Committee (MPC) for decision-making. The majority of members will be Reserve Bank internal staff, and a minority will be external members. The Reserve Bank Governor will be the chair.
“It is my intention that the first committee of seven members would have four internal, and three external members. Treasury will also have a non-voting observer on the MPC to provide information on fiscal policy,” Grant Robertson said.
The MPC is expected to begin operation in 2019 following passage of amending legislation. There will be a full Select Committee process for the legislation.
The RBNZ has been informally considering employment in its monetary policy conditions, as well as the growth prospects of the New Zealand economy. Decisions on the OCR have also been decided by an internal governing committee, rather than unilaterally by the governor. So these changes really just finalise what is already being done, and I doubt they will have much practical impact.
