What would change to Reserve Bank remit mean in practice?

Friday, 24 November 2023

At the moment, decisions about the official cash rate are made by a committee.

Changes to the Reserve Bank’s remit may not mean a lot in practice, economists say, but they could cause a perception problem.

It was revealed on Friday that as part of the coalition agreement, the new Government had agreed to focus the Reserve Bank’s remit solely on price stability.

It will drop its requirement to support maximum sustainable employment.

The Government will also seek advice on returning to a single decision-maker model. At the moment, monetary policy decisions, such as the level of the OCR, are made by a committee.

Advice would also be sought on replacing “medium term” in its current objective to “achieve and maintain future annual inflation between 1% and 3% over the medium term” with a more specific time frame.

ANZ chief economist Sharon Zollner said the remit change was unlikely to mean much practical change in any policy decisions, although it could allow the Reserve Bank to keep interest rates higher for longer, if that was what it felt it needed to do.

Labour leader Chris Hipkins says the newly-formed coalition government will 'take New Zealand backwards'.

“It’s not likely to be a gamechanger going forward. However, as unemployment rises you could envisage scenarios where a person on the street might perceive a tension.”

But she said in reality the level of unemployment was generally another marker of whether the economy was running hot or cold, which was what the Reserve Bank was weighing up when it made its decisions about how best to manage inflation.

Craig Renney, chief economist at the Council of Trade Unions, said the Reserve Bank governor had been open about the fact that the requirement to consider employment had not altered any of the bank’s decisions since it was introduced in 2018.

“But what it does do is it forces the Reserve Bank to publicly demonstrate how it has taken employment into consideration as part of its analysis. Taking it away means that the public may well not have that information. You’re making the quality of the conversation around interest rates and monetary policy poorer and narrower.”

He said New Zealand was not alone in having a dual mandate. But if the Government pushed ahead with the idea of a single decision-maker again, it would be an outlier.