MNI INTERVIEW: RBNZ Reform To Add Urgency To Inflation Fight

Proposed reforms of the Reserve Bank of New Zealand will lead to greater accountability and add urgency to its fight against inflation, a former governor told MNI.

The Reserve’s recent record has seen inflation persist above the 1-3% target for some time while the central bank racked up balance-sheet losses due to its bond-buying programme and "nobody is held accountable,” said Don Brash, governor between 1988-2002. Stressing the importance of preserving central bank independence, Brash said it should nonetheless be easier to remove poorly-performing governors.

The proposal of the recently elected centre-right coalition to once again make the governor solely responsible for setting the overnight cash rate is likely to fail, but the government will push for clearer expectations on how the Monetary Policy Committee is constructed and whether votes should be revealed, said Brash, who resigned as governor to serve as a member of parliament and went on to lead new Prime Minister Christopher Luxon’s National Party until 2006.

The government’s proposed changes, on which it will seek advice and which will require changes to legislation, also include the removal of the RBNZ’s employment mandate, time targets for monetary policy, and removing the Treasury observer from the MPC. (See MNI: RBNZ To Lose Dual Mandate Within 100 Days- Ex Staff)

Brash held sole responsibility for the OCR during his tenure, taking advice from an informal MPC, at a time when the treasurer and RBNZ board could more easily remove poor performing governors. “As a single decider, it meant I was personally on the line for delivering the inflation target and it certainly focuses the mind knowing you are the single person the government will hold accountable for inflation going outside the target range,” he said in an interview, adding that under current arrangements the RBNZ, governor and MPC all lack accountability.

Brash helped create an informal MPC, against the advice of Treasury and the Reserve’s board of directors, following the passage of the Reserve Bank of New Zealand Act 1989. The former Labour government established the official MPC in 2018, following a review of the Reserve, but former staffers have been critical of its lack of macro-economists. (See MNI: Loosened MPC Rules Seen Spurring RBNZ Policy Debate)

TIME TARGETS

Brash welcomed the potential return of mandated time constraints for returning inflation to target, noting a similar requirement existed in the 1990s. "I was happy to sign up to that timeframe because it looked realistic," he said, adding that these constrains themselves helped condition inflation expectations. “If we had a specific timeline, there would be real pressure to relieve [Governor Adrian Orr] of his position.”

On streamlining the RBNZ’s mandate to focus just on prices, Brash noted unemployment and inflation were broadly compatible most of the time, except when they rise above target simultaneously. “I favour going back to a single objective,” he said, noting most orthodox economists believed multiple mandates required more than a single policy tool.

Brash noted in August that persistently strong employment may force the RBNZ to hike further. (See MNI INTERVIEW: More OCR Hikes Possible - Ex-RBNZ Governor) The Reserve's updated forecasts released last month implied a further 25bp hike sometime over 2024, while reducing the chance of a cut.