Former Reserve Bank bosses oppose new policy

Patrick O’Meara (RNZ)

Wellington, March 26, 2018

Changing the way interest rates are set could harm the economy, according to former top central bankers.

Finance Minister Grant Robertson and incoming Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr will sign the Policy Targets Agreement (PTA) at 9 am today, adding full employment to its low inflation target.

“Crazy Policy”

“The route that we are going down is a disastrous route. Having multiple targets like that can destabilise the economy over a number of years. It is really a crazy policy,” former RBNZ Chairman Arthur Grimes said.

With the government also currently reviewing the Reserve Bank Act, analysts are unsure how much change there will be in the wording of the PTA this time round. But an employment objective will be included this year.

The USA example

But Dr Grimes is adamant a dual target has created instability in another country that uses it, namely, the United States.

“Almost every episode of financial instability in the world has come out of the US, and a lot of that is sheeted home to their dual targeting system,” he said.

Former RBNZ Governor Don Brash also argues that it would be a mistake.

He said that two policy objectives such as low inflation and full employment required two policy instruments to deal with them.

For and Against

“If there was a serious divergence with unemployment going up, and inflation going up quite strongly as well, the Reserve Bank would be a situation of having to choose between following one objective or the other. And that is where life would get tricky for them,” Dr Brash said.

In contrast, Business and Economic Research Limited Chief Economist Ganesh Nana favoured a broader mandate.

He said it indicated a change in mindset away from focusing on just inflation to help improve the economy, which mirrored Treasury’s current work on living standards and measuring how well-off was New Zealand.

Broader Objectives

“We are looking at broader objectives rather than the old fashion model that some economists cling to that as long as you’ve got GDP growth and you’ve got a central bank looking after inflation then everything else will fall into place, and the benefits will trickle down to everybody. That model is broken, and it is an old way of thinking,” Dr Nana said.

Employers and Manufacturers Association Chief Executive Kim Campbell is nonplussed by the change.

“I don’t think it is going to make any difference at all. In some respects, if they have to consider employment, they have to consider the business environment and that will be good for business,” he said.

Other Agenda

The signing of the PTA is not the only item on today’s agenda.

The results of phase one of the review of the Reserve Bank Act, including an overview of the new decision-making structure at the bank, will also be unveiled.

Mr Orr officially starts in the role as Reserve Bank Governor tomorrow.

Patrick O’Meara is Economics Correspondent at Radio New Zealand. The above Report has been published by Indian Newslink under a Special Agreement with www.rnz.co.nz

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