RBNZ backs decision-making committee but wants to keep it in-house

Photo / Mark Mitchell

The Reserve Bank of New Zealand is in favour of formalising a committee-based decision-making process but would prefer to keep out external members, and doubts adding employment as a joint mandate will have a major impact on monetary policy.

Finance Minister Grant Robertson released the terms of reference for the review of the Reserve Bank Act earlier this week, with a view to including maximising employment alongside the price stability framework and change the decision-making model for monetary policy decisions by introducing a committee approach drawing on external experts alongside officials.

Acting Reserve Bank governor Grant Spencer said the bank is in favor of changing the act to accommodate a committee "because we already operate with a committee". However, "the current governing committee is what you see here in front of you," referring to himself, assistant governor John McDermott and deputy governor Geoff Bascand. "So, we would like the act to reflect that."

Spencer was speaking at a press conference after the central bank published its November monetary policy statement and kept rates on hold at a record low 1.75 per cent.

On the issue of external advisors, Spencer said more diversity in decision making was positive but "there are potential issues," such as finding people with the appropriate expertise who are not conflicted "is a bit of a tricky issue" in a small country.

It will be critically important to ensure that the committee - if it does include external advisors - has a "collective responsibility," he said. Spencer pointed to other central banks where different policymakers express their views publicly and said "it turns into a bit of a circus."

A variety of different views can create volatility in financial markets and potentially undermine the credibility and reputation of the institution, he said. "We think the current internal committee works pretty well, so if it is going to be changed, we want to improve it, not worsen it, so that would be the challenge."

Regarding the move to include maximising employment, Spencer said: "moving to a dual mandate is unlikely to have a major impact on the way we run monetary policy". The bank already uses "flexible inflation targeting" where inflation is the primary objective, but not the sole objective. A dual mandate may mean its approach becomes more flexible "in the sense that it will allow greater volatility in inflation in order to promote more stability in employment," he said.

If the bank had a dual mandate today it "wouldn't have made much difference at all in our current policy stance," Spencer said.

He said in order to implement the mandate more work needs to be done on pinning down the so-called natural rate of unemployment or equilibrium rate as the central bank doesn't currently have a number. Estimates vary between 4 and 5 per cent, he said. Monetary policy won't achieve meet the current government goal of reducing unemployment below 4 per cent from the current 4.6 per cent unless the natural rate of unemployment is also lower, he said.

"We (the central bank) can have short-term influences but if you aim to get the equilibrium rate down on a sustainable basis then the government will have to make policy changes," he said.

Spencer is the central bank's acting governor until the end of March 2018 when a new governor will be appointed. He said the process is "well in train" and the aim is to have the new governor appointed well before his departure date.

Bascand, who has previously said he has put his hand up to be the new governor, today declined to comment on whether he was still keen.