Editorial: Bank chief should stick to old target

Graeme Wheeler. Photo / WORLD BANK

Graeme Wheeler, named yesterday as the next governor of the Reserve Bank, is less well-known than any appointee since 1989, the year the bank was given statutory independence to provide New Zealand with monetary stability. The governor at that time, Don Brash, had been previously known as an adviser on public policy. His successor, Alan Bollard, had been head of the Commerce Commission and Secretary of the Treasury. The third, Mr Wheeler, also from the Treasury, has been out of the country since 1997, working for most of that time at the World Bank.

While his international credentials are impressive, New Zealanders will hope he has kept in touch with the country's fortunes over the past 15 years. He will need a sense of how business and consumers here responded to all that happened in his absence, an Asian currency crisis, high commodity prices, immigration, the property bubble, recession, the global financial crisis, earthquakes, the Rugby World Cup ...

He has been given the most crucial role in the country's economic management. Governments delegate to the bank the task of maintaining non-inflationary growth, which it does by timely adjustments of the interest rate central banks charge for the overnight cash they supply to trading banks. The governor's monthly statements are the nation's most powerful barometer of its economic condition and outlook.

Statutory independence enables the governor to resist pressure from politicians courting immediate popularity. He can act well in advance of inflation or recession to restrain or stimulate consumption. The system has proven successful at containing inflation for several decades now, but it could not contain the house price inflation that put other strains on the economy and sent it into recession when the bubble burst.

Inevitably, the appointment of a new governor revives calls for the office to be given the task of containing asset price inflation too.

Labour and the Greens suggest "levers" besides interest rates that might be used to stop excessive lending on property when necessary. There is worldwide discussion of ways to prevent financiers creating debts and risk on the scale that caused the global crisis and has left governments with liabilities and deficits that still handicap an international recovery.

Central banks probably do need additional powers to regulate trading bank lending but it does not seem necessary, or wise, to include asset inflation in the next governor's policy targets agreement. A single target, using consumer price inflation, has not prevented the Reserve Bank from taking into account employment, exchange rates, economic growth or anything of economic significance.

Indeed, all of those - and house prices - have been taken into account each time the bank acted to keep the economy on a low-inflation path. Dr Bollard was constantly warning that house prices were overheated and doing his utmost to talk them down. If he had been equipped with better means to deflate that bubble, he would have done so - within his price stability target.

He did not need multiple targets, and nor does his successor.

Fortunately, the bank and the Finance Minister seem to agree a single inflation target is sufficient. Assistant Governor John McDermott praised the present system in a speech last week and yesterday Bill English did not envisage any significant change when he negotiates a target with Mr Wheeler.

Anyone old enough to remember inflation would keep the new governor's eye on price stability. Without it, everything loses value and growth is a mirage.

Let us hope Mr Wheeler remembers.