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English scotches speculation Reserve Bank letter shows concern over performance

Finance Minister Bill English today released a letter setting out his expectations for the Reserve Bank board.

Tina Morrison
Fri, 22 Apr 2016

Finance Minister Bill English has scotched speculation that he is concerned about the Reserve Bank's performance after he stepped up his oversight of the central bank.

Mr English today released a letter setting out his expectations for the Reserve Bank board, which he penned in November last year for the first time. The letter sets out his specific interests for the board's monitoring role, including the performance of monetary policy with respect to the Policy Targets Agreements, that he wants six-monthly meetings to discuss the bank's performance, and that he expects to discuss its assessment of the governor's performance from time to time.

The letter comes after criticism of governor Graeme Wheeler for his failure to return inflation to the midpoint of his 1-3 percent target band as set out in the PTA and for his communication after most economists were surprised by his cut to the benchmark interest rate last month, which they said contradicted the message of an earlier speech where he signalled there was no rush to ease further in response to weak inflation. However Mr English said his letter setting out his expectations to the board wasn't linked to concerns about the Reserve Bank's performance.

"Ministers typically send letters of expectation to the boards of entities in their portfolio. This letter was prepared after the Treasury identified an opportunity to bring the accountability framework into line with other Crown agencies," Mr English said in a statement. "This change reflects the government's focus on good public sector practice and has not been driven by any concerns with the Reserve Bank's performance."

Inflation accelerated at a lacklustre 0.4% annual pace in the first three months of this year, and has now been below the target band for each of the past six quarters. The Reserve Bank has said it can tolerate an extended period of weak inflation because it views the phenomenon as temporary, driven by a slump in oil prices. It's also wary that cutting interest rates further to bolster inflation could inflame the housing market where it has concerns about inflated prices causing financial instability.

Mr English told BusinessDesk last month he was happy the Reserve Bank was acting consistently with the agreement and acknowledged it was in "some challenging territory."

The Reserve Bank's move to introduce lending limits to curb price gains in Auckland's housing market under its financial stability mandate has also sparked speculation of tensions between it, the Treasury and the government.

In his November letter, Mr English noted he wanted the board to monitor the bank's important stakeholder relationships, with himself, the Treasury, regulated entities and with other agencies, and keep under review how the relationships are operating in practice.

Governor Wheeler's five-year term ends September 2017 and he hasn't yet indicated if he will seek a second term. Governors are appointed by the Minister of Finance on the recommendation of the Reserve Bank board.

Asked by BusinessDesk in an interview last month how likely it was that Mr Wheeler might stay for another term, English wouldn't comment beyond saying that would "unfold." Questioned on tensions over low inflation and housing, Mr English said: "We are not at all concerned about those things".


Tina Morrison
Fri, 22 Apr 2016
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English scotches speculation Reserve Bank letter shows concern over performance