Robertson seeks 'steady as she goes' course for monetary policy reform

Finance Minister Grant Robertson has used his first press conference since taking office to signal to financial markets that the new government remains committed to predictable monetary policy.

Mr Robertson held a formal ceremony with acting Reserve Bank governor Grant Spencer to sign afresh the existing Policy Targets Agreement that puts inflation targeting at the heart of monetary policy until a review and new legislation to alter that focus is completed next year.

The move comes ahead of Thursday's monetary policy statement, the first full review of the state of the economy and inflationary pressures since before the election and the September 30 retirement of the previous Reserve Bank governor, Graeme Wheeler.

Mr Robertson re-signed the current policy target agreements, despite the fact he “wasn’t obliged to do that [when] becoming finance minister.”

But he says it was an appropriate course of action to ensure everyone has confidence that the present monetary policy arrangements will continue until a new governor is appointed.

When a new governor is appointed, that automatically triggers a negotiation of the policy targets agreement.

Mr Robertson says he has met with the bank chairman who has assured him the candidates interviewed so far were able to implement a change to policy, “along the lines that we’re going.”

On the review of monetary policy, Mr Robertson says it will take part in two phases.

“The first phase will start immediately and will look specifically at the issues we raised during the election campaign – in particular, the expansion of the objectives of the bank to maximise employment.”

Same inflation target

He says the government remains committed to the price stability framework, keeping inflation between 1-3% with a target of 2%.

“But we want to add to the objectives of the bank a focus on how monetary policy contributes to the Labour and NZ First’s goal of full employment.”

Mr Robertson doesn't intend having a specific percentage target for unemployment.

The minister faced repeated questioning at a media conference as to whether the inclusion of an employment target is likely to lead to lower interest rates but acknowledged current low unemployment, high workforce participation, and emerging signs of higher inflation could have the opposite effect.

"There are many, many different scenarios that could occur," says Mr Robertson, who has previously criticised the Reserve Bank for raising interest rates prematurely. The bank started lifting the official cash rate in 2014 in a series of moves but by May 2016, the rates started falling again.

Mr Robertson suggests if mandating full employment had been included in the policy-making framework when the Reserve Bank was increasing the official cash rate in 2014, it “might have influenced a different decision."

Two phase-review

He also confirmed the government wants to see some changes to the central bank’s decision-making process.

“We believe the single decision-making model, enshrined in the Reserve Bank’s process, is out of date,” Mr Robertson says.

That's despite the fact that while the governor makes decisions alone, he or she is aided by an internal committee structure for monetary policy decisions.

The finance minister wants to “codify that” and bring some external voices to the table that will help improve the decisionmaking process.

The process will also be more transparent, he says, including publishing the minutes of the committee meetings.

He says the government is asking the Treasury and the Reserve Bank to work together to produce detailed recommendations to fulfil those commitments and an independent expert advisory panel will be established to support that work.

A bill to progress the policy elements of the review will be introduced as soon as possible next year, giving greater certainty to how the reform is shaping up before the next Reserve Bank governor is appointed, scheduled for March 2018. Mr Robertson says he had yet to see the last review of the Reserve Bank by former state services commissioner Iain Rennie, which was ordered by the previous government and is understood to have been completed some months ago.

An independent expert advisory panel will be appointed by the finance minister to provide input on both phases of the review.

The second phase of the review will have the Treasury and the Reserve Bank working together with the independent expert panel to identify “other issues” that are useful for a second look, or another investigation. This list and the next review stages will also be made public early in 2018.

The Reserve Bank Act was introduced in 1989. Mr Robertson says the monetary policy framework with its focus on just inflation has served New Zealand well in general but the Reserve Bank Act itself is a “product of its time in the late 1980s.”

Since then, he says there has been “significant pressure” on monetary policy in recent years – partially in the wake of the global financial crisis.

He says the coalition government is committed to an export-led economy but a specific mandate for keeping the New Zealand dollar at a certain level probably won’t be considered.

(Additional reporting BusinessDesk)