New Government passes its first bill, reverting Reserve Bank to single mandate

The new Government has passed its first bill, a law change that will revert the Reserve Bank to having a single mandate, which will be to maintain price stability - essentially to keep inflation low.

After a change made by the former Government in 2018, the bank was given a dual mandate: keeping inflation low, and supporting maximum sustainable employment.

It responded to fears from some economists that the bank can be too zealous to raise interest rates at the spectre of inflation, choking off the economy and leading to unemployment. Proponents of the single-mandate system argue the opposite: that two mandates means the bank is too slow to jump on inflation.

Finance Minister Nicola Willis said the new mandate had led to a lack of focus on inflation from the bank. However, there is little evidence that the dual mandate contributed to the high rates of inflation seen in the last two years.

In a Regulatory Impact Statement, Treasury recommended the Government not bother with amending the bank’s legislation and instead simply issue a new remit, which would direct the bank to focus on inflation and remove the reference to employment in the current remit.

The new Government preferred to go one step further and amend the bank’s governing legislation.

Willis said that restoring the bank to a single mandate would help it in its fight to tame inflation, which it had done in the past.

“For nearly 30 years, the Reserve Bank’s sole objective for monetary policy was price stability. The introduction of that policy regime was a tremendous success - supporting the end of the high and volatile inflation that had previously plagued New Zealand for decades,” she said.

“In 2018, the Labour Government amended the Reserve Bank’s governing legislation to introduce a new secondary objective of achieving maximum sustainable employment, sitting alongside the prior focus on inflation.

“This change was a mistake. With no hierarchy of objectives, the introduction of a dual mandate heightened the risk of a future policy error - with monetary policy led in multiple directions, even as inflation embedded itself in the economy.”

Labour’s finance spokesman Grant Robertson, who added the second mandate when he was Finance Minister, told Parliament that it was a “sad indictment” on the new Government that reverting to a single mandate was the first piece of legislation put forward.

“It stands in stark contrast to what happened in the first hundred days of the Government in 2017, where we passed legislation to increase access to paid parental leave, where we passed legislation to create the winter energy payment and the Best Start payment, where we moved to make sure that there was legislation so that New Zealanders who lived in rentals lived in healthy rentals. That’s what you do when you’ve got a bold, progressive plan of action,” Robertson said.

He said the bill showed the new Government’s lack of ideas, alleging they were falling back to a “Milton Friedman-style dream” from the 1980s.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.