Reserve Bank Governor-designate Adrian Orr and Finance Minister Grant Robertson said there would be no change to the Bank’s two percent mid-point target for inflation when they signed the Reserve Bank’s new Policy Targets Agreement at the Beehive on Monday, but they did include a new aim of supporting maximum levels of sustainable employment.
Robertson used the opportunity to sketch out changes to the Reserve Bank Act that the Government hopes to introduce this year, including plans for a new formal monetary policy-making committee with external members that publish minutes.
Reserve Bank Governor-designate Adrian Orr and Finance Minister Grant Robertson signed the Bank's Policy Targets Agreement on Monday in the Beehive Theatrette. Robertson used the occasion to announce Cabinet decisions on Phase 1 of the review of the Reserve Bank Act, which Robertson said had “fed into” the new PTA.
The agreement maintains the target for future annual CPI inflation at between 1and 3 percent over the medium term, focusing on keeping future inflation near the mid-point of 2 percent.
The announcement was the first opportunity to see what monetary policy might look like after the Government’s proposed changes to the Reserve Bank Act are implemented. The changes are a result of Phase 1 of the review of the Reserve Bank, which has been completed. Robertson announced that the Government hoped to introduce legislation to amend the Reserve Bank Act by the middle of the year.
The most significant of the changes will be broadening the RBNZ’s focus to include targeting “maximum sustainable employment” alongside its traditional mandate of maintaining price stability by targeting inflation. The United States, Australia and Norway all have similar dual mandates.
Robertson said that there would be no quantitative target for the unemployment rate as employment was “dynamic” and monetary policy was only one contributor to employment outcomes.
The Bank would also move to a committee decision making model for setting monetary policy. The Governor currently carries the sole responsibility for setting policy, although the Bank has moved informally to create a committee to set policy. This committee will now be formalised, though its composition will include several new members.
The new committee will have external members, and all members of the committee will be appointed by the Minister of Finance on recommendation from the Board of the Reserve Bank. The committee will have five to seven members and have a minimum of two external members and a maximum of four internal members.
Minutes of the committee’s policy-setting meetings will also be published and a representative from Treasury will observe the committee. Robertson said that this will serve to give Government better advice but was keen to stress that it did not undermine the historic independence of the bank.
Orr said that Monday’s PTA was "a bridge" between the current Act and its proposed reformed version.
Orr expressed that he was happy with where the economy was at the moment.
“I’d say that we are running a very very healthy economy at the moment," he said. He said that most of the time, the new employment mandate should not make too much of a difference to the bank's decision.
“It’s always going to be conditional on the issues," he said, "in general times it shouldn’t make too much of a difference".
He would not say whether he thought monetary policy had been too tight in the last five years.
"I haven’t done any of that genius of hindsight analysis," he said.
Robertson said the March PTA had been amended in a matter "consistent with the direction of proposed legislative reform". This PTA would also require the Bank to explain how the monetary policy decision decisions contribute to maximum levels of sustainable employment.
Orr, the former CEO of the New Zealand Superannuation Fund, begins his job at the Bank on Tuesday.