As good as his word, Finance Minister Grant Robertson has preserved the essential pillar of economic stability in his monetary policy targets agreement with the new Reserve Bank governor, Adrian Orr. Their agreement, signed last week, differs in sentiment but not substance from the previous agreements under which New Zealand governments hold their independent central bank to account.
As Labour promised before last year's election, it gives the Reserve Bank two monetary policy objectives rather than one. In addition to its previous single goal of "maintaining a stable general level of prices" it must now also "contribute to supporting maximum sustainable employment within the economy". But, as Robertson also promised, the employment goal is not defined as a specified percentage of the workforce, unlike price stability, which retains the target of 1-3 per cent annual increase in the consumer price index.
A numerical target provides a much sharper focus than any formula of words. The bank's only employment obligation is to ensure its regular monetary policy statements "explain how current monetary policy settings contribute to supporting maximum levels of sustainable employment".
It is no coincidence the dollar rose against the US and Australian currencies on the day of the policy targets agreement. While the main reason was the slide in iron ore prices amid fears of a trade war triggered by US tariffs on steel and aluminium, the kiwi would have been strengthened by the proof of the new Government's commitment to monetary orthodoxy. There had been a risk, however remote, that the bank's focus would be fatally compromised.
That could have happened if inflation and unemployment began to rise at the same time, as in the 1970s. Until then, economic theory said it would not happen. It was believed lower inflation came at the cost of higher unemployment and that some inflation should be tolerated for the sake of full employment. When monetarism was adopted to bring inflation down, the resulting unemployment proved temporary.
