Employment top concern in new Reserve Bank PTA

Finance Minister Grant Robertson and incoming Reserve Bank governor Adrian Orr signing the PTA. (Photo: Jenny Ruth)

A new Policy Targets Agreement (PTA) setting out specific targets for price stability and to consider employment outcomes in the conduct of monetary policy has been signed by the government.

Finance Minister Grant Robertson and incoming Reserve Bank governor Adrian Orr have both signed a new PTA, which will take effect from March 27, 2018, under the provisions of the Reserve Bank Act 1989.

The agreement continues the requirement for the Reserve Bank to keep future annual CPI inflation between 1-3% over the medium term, with a focus on keeping future inflation near the 2% mid-point. It also requires monetary policy to contribute to supporting maximum levels of sustainable employment within the economy.

The new focus on employment outcomes is an outcome of the first phase 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,” Mr Robertson said in a press release.

“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 US, Australia and Norway.

“Work on legislation to codify a dual mandate is under way. In the meantime, the new PTA will ensure the conduct of monetary policy in maintaining price stability will also contribute to employment outcomes,” he says.

A bill will shortly be introduced to Parliament to implement the cabinet’s decisions on recommendations from Phase 1 of the review (see fact sheet here). As well as legislating for the dual mandate, this will include the creation of a committee for monetary policy decisions.

“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,” Mr Robertson says.

“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 on a range of five to seven voting members for a monetary policy committee (MPC). Most members will be Reserve Bank internal staff and others will be external members. The Reserve Bank governor will be the chairman.

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.

Mr Orr says the PTA recognises the importance of monetary policy to the wellbeing of all New Zealanders.

“The PTA appropriately retains the Reserve Bank’s focus on a price stability objective. Price stability offers enduring benefits for New Zealanders’ living standards, especially for those on low and fixed incomes. It guards against the erosion of the value of our money and savings, and the misallocation of investment.”

Mr Orr says the PTA also recognises the role of monetary policy in contributing to supporting maximum sustainable employment, to be captured formally in an amendment bill. 

“This PTA provides a bridge in that direction under the constraints of the current act. The Reserve Bank’s flexible inflation targeting regime has long included employment and output variability in its deliberations on interest rate decisions. This PTA makes it an explicit expectation that the bank accounts for that consideration transparently. Maximum sustainable employment is determined by a wide range of economic factors beyond monetary policy.”

Mr Orr welcomes the intention to use a monetary policy committee decision-making group.

“Widening the committee to include external members also brings the benefit of diversity and challenge in our thinking while enhancing the transparency of decision-making and flow of information,” he says.

Phase 2 of the review is being scoped. It will focus on the Reserve Bank’s financial stability role and broader governance reform. Announcements on the final scope will be made by mid-2018 and subsequent policy work will start in the second half of this year.

More to come.


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Tweedledee and Tweedledum.

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Will they be insisting on Iwi members on the MPC like they do on councils also?

Any new ideas on bringing raging asset price inflation into the 'price stability' mandate? Low and middle income groups afford a special mention here and I can't tell if it is cynical or wantonly ignorant since the bald facts that they are most likely to have their kiwi dollar savings diluted to insignificance over their lifespan by none other than the Reserve Bank of NZ.

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I read the bit about price stability being good for low and middle income groups and had a chortle as well. The OCR is only at historically low rates because the RBNZ is afraid to raise rates in the face of historically nose-bleed, unsustainable levels of household debt, cause by an epic real estate bubble, which can only be massaged towards a soft-landing over a very, very long time to avoid a large recession and thus massive price instability.

I bet some commentators on here who argue ad eternum for higher interest rates because their term-deposits are being eroded by inflation and taxes will have a giggle as well!

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Too right.

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The Reserve Bank needs a" Rental Housing shortfall indicator" because Landlords are departing in droves after Labour policy threats.

Labour's" Landlord Threat Policy" LTP is creating a Rental Crisis that is the worse ever disaster in New Zealand's history!

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The Reserve Bank should control Jacinder who needs to stop Millions of dollars hand outs to the Islands like Tonga Samoa and start caring about home and families in New Zealand !

Renters are being left in the cold with no available housing because Labour have this hatred towards Landlord housing providers? Why ?

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Well now isn't amazing how homo-sapiens once survived, not only survived but happily progressed without a "central bank".
Then some one decided that "economics" was a science, people had to go to University to "learn" economics. (I wonder where the first "professor of economics" got his learning from?)
So we get to to-day where academics have convinced the public that the only way ahead is to have a Reserve Bank Governor" sitting in his Reserve Bank playing with his lever deliberately creating inflation on orders (aka PTA) from the gov.(Who claim this un-elected economic genius is "independent").

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In other words bums on seats, and there's thousands of them out there. You could apply what you wrote to every govt department, and city council for that matter.

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