Venu Menon
Wellington, December 16,2023
The Reserve Bank of New Zealand (Economic Objective) Amendment Bill, passed by Parliament in its penultimate sitting before the Christmas break starting next week, narrows the Reserve Bank’s Remit from a dual economic objective to a single one.
The Remit guides the Bank’s decision making on monetary policy and Official Cash Rate adjustments every six weeks.
The Remit, along with the Charter and the Code of Conduct, is a key component of New Zealand’s monetary policy framework.
Monetary policy sets the direction of the economy, with the Minister of Finance setting the targets and operational objectives for the Reserve Bank’s Monetary Policy Committee (MPC) to follow while managing the economy.
The current Remit was issued on 13 December 2023 and comes into effect a day after Royal Assent is accorded to the Reserve Bank of New Zealand (Economic Objective) Amendment Act 2023.
In a significant departure from the previous Labour Government, the Remit to the Reserve Bank issued by Finance Minister Nicola Willis of the new National-led coalition government has dropped the clause (inserted by her predecessor Grant Robertson), which reads:
“Support maximum sustainable employment. The MPC should consider a broad range of labour market indicators to form a view of where employment is relative to its maximum sustainable level, taking into account that the level of maximum sustainable employment is largely determined by non-monetary factors that affect the structure and dynamics of the labour market and is not directly measureable.”
The Reserve Bank’s dual mandate has been removed and the Bank is now tasked with tackling inflation and bringing it within the target band of 1 to 2 %.
Monetary Policy Review
The Reserve Bank of New Zealand Act 2021 requires the Bank to review the Monetary Policy Remit every five years.
The Bank’s review of the Remit issued by then Finance Minister Robertson was published on 27 June 2023. As a result, the minister made changes to that Remit.
The next such review must take place no later than 2028.
The last review, which was the first to be undertaken under the Reserve Bank of New Zealand Act 2021, examined, among other things, economic shocks such as the disruptions to the supply chain.
The review also involved engagement with the public via consultations, workshops, surveys, public briefings and webinars.
Inflation vs Employment objective
One key issue reviewed was the extent to which the Remit should focus on the inflation objective over the Maximum Sustainable Employment (MSE) objective.
“On balance, the public engagement suggested that there was a slight preference for a greater emphasis on achieving low and stable inflation,” the review noted.
Targeting inflation
The Reserve Bank says it considers “Flexible inflation targeting” to be the most appropriate framework for New Zealand.”
It adds: “A flexible inflation targeting framework allows the MPC to support maximum sustainable employment (MSE).”
The Bank argues this is the “most common framework among advanced economies and it has become well-established and understood by the public.”
On the coupling of the inflation and MSE objectives, the Reserve Bank concedes: “There has been little practical experience in managing trade-offs between the inflation and MSE objectives since the dual mandate was introduced.”
Divided opinion
MPC members are divided on the issue of operational objectives. The Reserve Bank notes that most members support introducing a “hierarchical ordering of objectives,” though some members think that would reduce the “flexibility for the MPC to use discretion when a trade-off arises between the two objectives.”
House prices
The last Remit required the MPC to “assess the effects of its decisions on the Government’s policy to support sustainable house prices.”
However, the Reserve Bank recommended removing from the Remit the “requirement to assess the impact of monetary policy on the Government’s policy to support more sustainable house prices.”
Policy Target Agreements (PTAs)
The last Remit was preceded by the Policy Target Agreements (PTAs) which were often “reviewed and renewed” when there was a change in the Minister of Finance or the Governor of the Reserve Bank.
The PTAs did not involve any engagement with the public. They were also not subject to thorough, regular reviews. By contrast, Remit reviews follow a regular time cycle of five years, as laid down by the Act.
Changes to Remit
The Reserve Bank of New Zealand Act 2021 empowers the Reserve Bank to advise the Minister of Finance on recommended changes to the Remit. The Act also requires the Reserve Bank to seek the views of the public before advising the Minister of Finance on changes to the Remit.
In addition, the Bank also consults the MPC. But the Minister of Finance is finally responsible for making decisions on changes to the Remit.
Climate change
Public submissions have not been in favour of including house price sustainability and climate change in the last Remit. There was also some confusion around the Reserve Bank’s role of supporting MSE.
Public preference
Insights gleaned from the workshops and surveys from the earlier Remit indicate that New Zealanders in general are “uncomfortable choosing between inflation and unemployment, but tended to prioritise inflation after considering the severity and extent of potential harm,” the Reserve Bank has noted.
On balance, the National-led three-party coalition government and the Reserve Bank of New Zealand are headed for a period of adjustment as the government’s fiscal policy aligns with the Bank’s monetary policy.
Venu Menon is an Indian Newslink reporter based in Wellington
