Reserve Bank ends total focus on price stability

In a controversial move, the Reserve Bank will include full employment in its policy targets, rather than focussing solely on price stability. The bank will also move to policy by committee instead of leaving interest rate decisions to the governor alone.

The changes were announced this morning by Finance Minister Grant Robertson and soon-to-be-inaugurated governor Adrian Orr, as part of a new policy targets agreement. The new PTA re-iterates the goal of keeping annual CPI inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point of 2 percent. But along with a goal of maintaining price stability, the central bank will have a goal of "supporting maximum sustainable employment within the economy," the new PTA says.

"The Reserve Bank’s flexible inflation targeting regime has long included employment and output variability in its deliberations on interest rate decisions," Orr said in a joint statement. "What this PTA does is make it an explicit expectation that the bank accounts for that consideration transparently."

Not everyone is in favour of the new regime, which brings New Zealand in line with countries like the US, Australia and Norway. Former Reserve Bank governors Arthur Grimes and Don Brash told Radio New Zealand that having two potentially divergent policy objectives could create uncertainty.

"Almost every episode of financial instabiliy in the world has come out of the US, and a lot of that is sheeted home to their dual targeting system," Grimes said.

The announcement also includes the first phase of a review of the Reserve Bank Act, including a new monetary policy committee (MPC) for decision making. At present policy decisions are the final call of the governor alone, although in practice the bank's internal governing committee has made decisions on monetary policy.

Robertson said a bill will be introduced to Parliament in the coming months to implement the Cabinet’s decisions on recommendations from Phase 1 of the review. "As well as legislating for the dual mandate, this will include the creation of a committee for monetary policy decisions," he said.

"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," Robertson said. The MPC will have seven members - four internal at the bank and three external, along with a non-voting observer from the Treasury.

"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," he said.

Phase 2 of the review of the RBNZ Act "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 commence in the second half of 2018."


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