Back in the early 1990s, the Reserve Bank of New Zealand was a pioneer, a pacesetter in adopting a specific inflation target and the means to oversee that at the central bank that its peers in other countries eventually followed over the next decade or so.
But those other central banks, while maintaining their targets, have moved to a higher level of transparency and organisation insofar as the decision making process and its explanation are concerned.
So from being a global leader, the RBNZ has fallen behind and now the new Labour Government in New Zealand is about to start shaking up the country’s central bank and dragging it up to parity with Australia, the US and UK central banks in so far as how it sets interest rates and increasing its transparency.
Currently the RBNZ has an inflation target of 1% to 3% over the medium time, the RBA is 2% to 3% over time, the Fed is 2% (with flexibility)
New Zealand Finance Minister Grant Robertson says he wants the central bank to move to a committee-based decision making with outside experts and the publication of minutes from policy meetings.
As well as giving the Reserve Bank a new governance structure, the Labour government has confirmed it will broaden the bank’s mandate to include full employment in addition to price stability.
The changes will be the most significant for the RBNZ since it adopted an explicit inflation target in 1990, pioneering a model that’s now widely used around the world today.
The RBNZ governor has sole responsibility for policy, though decisions are in practice made collectively by a committee comprised of the governor, two deputies and the bank’s chief economist.
Labour wants three external experts to be added to form a seven-member committee, with each vote carrying equal weight (a bit like the Bank of England model and not the models of the RBA or the Fed). A non-voting Treasury official would also attend meetings. The head of Federal Treasury attends RBA board meetings.
The next Monetary Policy decision is out a week Thursday and acting Governor, Graeme Spencer will have sole control of that decision and others until next March when a new governor is expected to be appointed.
The Reserve Bank in Australia has a board that decides on rates (with business representatives and outside economists or economist), while the Bank of England has a committee made up of bank representatives and outside experts. It will decide tonight on UK rates, with the B0E widely expected to lift its key rate for the first time since 2003 in an announcement Thursday night, our time.
The US Federal Reserve has a policy making body called the Open Markets Committee which started its latest meeting overnight Tuesday and announced its decision early Thursday morning. This Committee consists of the Fed governors and voting heads of the 12 Fed districts across the US which changes yearly.
The RBA, BoE and Fed all publish minutes of each decision making meeting – the BoE publishes their’s immediately (so it will be out around 10pm Sydney time Thursday). The RBA’s are published with a two week delay and the Fed’s delay is three weeks.
“Those changes within the governance area that we flagged earlier in the year we are seeking to go ahead with,” Robertson told Radio New Zealand in an interview this week (http://www.radionz.co.nz/news/business/342766/robertson-very-confident-about-state-of-nz-economy).
"To be able to see the sense of the direction of the bank, the way in which decisions are getting made, that level of transparency is actually very helpful. Market information is improved, it increases the amount of certainty that people have.”
Mr Robertson made it clear in the interview that the government will not set a numerical target for the employment target – he wants the RBNZ to have the same sort of mandates that the Fed emphasises – maximising employment, stabilising prices, and moderating long-term interest rates. The first two are widely referred to as the central bank’s ‘twin mandates’ by commentators who forget the third.
