RBNZ says some decision-making 'evolution' may be needed
The Reserve Bank has told the finance minister that changes to its decision-making approach should be by "evolution" and the central bank doesn't want to lose control of its governing legislation.
In its briefing to Finance Minister Grant Robertson, presented in October and released publicly today, the Reserve Bank says it has discussed with the Treasury whether there are opportunities to enhance its decision-making process, which has evolved since inflation targeting was first introduced in 1990 and now covers prudential supervision and macro-financial policy.
"The Reserve Bank believes that its decision-making approach is sufficiently flexible to enable further evolution to occur as appropriate," it says, while going on to note that Robertson has "indicated your desire to review and reform the (Reserve Bank) Act to broaden the bank's mandate to include an employment objective, and to adjust the Reserve Bank's monetary policy decision-making structures, introducing external members into the committee."
The bank said it endorses the Labour Party's policy statement on the importance of maintaining the integrity and independence of its decision-making, including having a majority of internal members on its governing committee. "We recommend that the review of the RBNZ Act be limited to your stated change objectives."
It also said it has discussed several possible changes with Treasury over the course of the year, including formalising the committee structure that has evolved in the Reserve Bank Act, as well as creating separate decision-making committees for monetary and financial policy.
There is currently a single governing committee that is responsible for all major economic and financial policy decisions. It includes the governor, deputy governor, assistant governor-head of economics and is chaired by the governor. It is that committee that it would seek to formalise under the act.
The bank notes the governing committee makes decisions by consensus rather than voting and "provided the governing committee remains relatively small, we believe it should continue to make decisions by consensus, with the governor having the final decision if no consensus can be achieved." It also said ultimate accountability for policy decisions made by the governing committee would be retained by the governor. The governor would remain chief executive of the bank.
The government's proposal to introduce external members to the policy committee is "feasible", it said. The extent to which policy committees benefit from external members depends on the nature and objectives of the committee and the conditions associated with the external members' appointment. It notes that policymaking in monetary and financial policy often involves complex considerations based on multiple indicators, analytic models and competing economic theories. As a result, full-time members with experience and expertise are likely to be better suited than part-time external participants, it said.
Regarding the introduction of an employment objective, it notes the RBNZ already takes unemployment into account in its monetary policy.
The briefing paper also says Robertson's predecessor had sought advice on the appropriate responsibility for administering the Act and noted that an argument had been made that the bank wasn't a government department and shouldn't administer its own act.
"The bank does not consider that administration of the act should be transferred," it says. "The bank is directly responsible to the Minister of Finance and legislative amendments are decided by Cabinet." A recent review of the administration of the framework for secondary legislation by James Every-Palmer QC commissioned by the Treasury stated that "prudential provisions in legislation are highly technical and in my view should be prepared by the Reserve Bank".
The central bank also identified its 10 most important projects. Of these, five are ranked as being of high priority: The Financial Market Infrastructures Bill; the OTC derivatives review; the IMF FSAP project, which was "a thorough and comprehensive review that included a benchmarking of New Zealand's financial regulatory regimes against international standards"; a review of the bank's capital; and the "dashboard" project, aimed to be an improvement of the quarterly disclosure statements made by commercial banks.
The Reserve Bank also said it is reviewing its currency operating model and infrastructure "to ensure that the currency needs of New Zealanders will be met in the future."
The paper pre-dates the Nov. 9 monetary policy statement.
It also said that other legislative changes that may be desirable over time could include creating separate decision-making committees for monetary and financial policy, clarifying the role of the minister of finance in macro-prudential policy decision making and clarifying the role of the minister of finance in the management of a failing institution.