Reserve Bank decision making

Hamish Rutherford at Stuff reports:

The Treasury lobbied for the governor of the Reserve Bank to be stripped of the right to solely decide on interest rate decisions, saying it created risk of “poor judgment”.

When Alan Bollard confirmed that he would stand down from the role last year, senior Treasury officials wrote to Finance Minister Bill English suggesting decisions on the official cash rate (OCR) should be made by a committee, rather than having the decision rest solely with the governor.

“Internationally it is usual to have a committee approach, with a range of possible committee structures,” senior analyst Renee Philip wrote last year, adding that the role of the Reserve Bank had broadened.

“The current single-decision-maker approach poses risks, such as a greater risk of poor judgment by a future governor than with a committee.

This is a worthwhile debate to have.

As I understand it, the Reserve Bank does have a committee that discusses the official cash rate settings, but it is advisory not decision making. One could have it as the official decision maker. It wouldn’t change the decisions, but would give some greater certainty. However it might reduce the accountability of the Governor, as he or she is the one who can be sacked if underlying inflation persist outside the agreed target range.

BNZ, Westpac, NZIER, Infometrics and Berl economists appeared to back the idea of a decision-making committee.

According to the Treasury, BNZ feedback was that a “committee internal to [the Reserve Bank] would ensure against risk of a future rogue governor”.

The Green Party said the advice of the Treasury aligned with its position.

No, it doesn’t. The Greens have said they want a committee to decide, but there is a key difference with Treasury advice. Treasury have said (and most international models are like this) that the committee should comprise senior staff of the Reserve Bank – ie be an internal committee.

The Greens want an external committee where they and/or sectoral interests such as unions, farmers and manufacturers have representatives on the committee. That has considerable danger.