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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