MNI: RBNZ To Lose Dual Mandate Within 100 Days- Ex Staff

New Zealand’s incoming government is likely to drop the Reserve Bank of New Zealand’s dual mandate targeting employment as well as inflation within its first 100 days in power and change the makeup of the Monetary Policy Committee, former Reserve staff and treasury advisors told MNI.

The conservative National Party, which received 40% of the ballot, beating Prime Minister Chris Hipkins’s Labour, in Saturday’s election, has promised a single focus on price stability for the RBNZ, while minor parties it will rely on to form government have also called for central bank reform. (See MNI: RBNZ Faces Post-Election Shakeup - Ex-Staffers)

The next finance minister, Nicola Willis, has refused to express confidence in RBNZ Governor Adrian Orr, noted Michael Reddell, independent economic commentator and former special adviser, economics, at the Reserve. While the new government will not be able to remove Orr easily, it could make his tenure uncomfortable, Reddell said.

The Labour government, which shifted the RBNZ to a dual mandate incorporating employment in 2019, reappointed Orr for a five-year term in March. Two MPC seats will also need filling over the next six months, which the new government will need to approve.

“There are also issues around the way in which the MPC members are encouraged to speak or not to speak, and [Willis] could change that in a way that improves the Reserve and also puts pressure on the governor to think about whether this is really what he wants to do for the next four years,” Reddell said.

The MPC was already facing change, after recruitment policies were changed to allow it to add more active economists, raising the prospect of greater debate. (See MNI: Loosened MPC Rules Seen Spurring RBNZ Policy Debate)

While greater clarity on the new government’s RBNZ strategy is needed, Reddell said it could also seek to split the Reserve and remove its prudential powers, taking it closer to the Australian model.

The ACT Party, which will likely form part of the coalition, has also criticised the RBNZ’s “bloat” and called for a deeper review into its operation. Any timeline on changes, or a review, remains unclear, though, said Reddell.

AROUND THE MARGINS

Sam Warburton, former New Zealand Treasury advisor, said questions on the Reserve’s performance during the pandemic needed addressing, particularly its justification of bond-buying operations with employment forecasts which proved to be over-pessimistic.

"I do think [the RBNZ] went too far, it was too expansionary and that’s contributing to some of the inflation outcomes we're seeing at the moment,” Warburton noted. Initial forecasts of 14-30% unemployment were quickly proved false as the government implemented stimulus, he added.

“I think the criticisms around expansionary monetary policy is likely to be valid – [the RBNZ ] could have eased off earlier as employment data came in."

INFLATIONARY SPENDING

The Nationals’ tax and spending plan may add slightly to inflationary pressures, Reddell added. Prior to the election, Reddell and other economists including Warburton noted the party’s plans to raise NZD750 million by ending a ban on purchases of high-end homes by foreign buyers and instead to tax them would likely only capture NZD290 million.

While questions remain on the shape of future coalition policies, incoming Prime Minister Christopher Luxon has reaffirmed his commitment to tax cuts in 2024 despite the release of a Pre-Election Economic and Fiscal Update in September, which increased deficit forecasts out to fiscal 2026/27.

“The revenue measures Nationals talked about to raise money to pay for [tax cuts] are not guaranteed to receive support across the coalition and will likely not raise as much money as that counted on," Reddell said. "So there is upside risk to demand from fiscal policy over the next year or so.”