Grant Robertson has a statement out today asserting that “Monetary Policy Must Get into 21st Century”. Setting aside the fact that his party was in office for half the 21st century so far, had two reviews undertaken of the framework (one by Lars Svensson, an internationally-regarded expert, and one by the Finance and Expenditure Committee), and made no changes to the thrust of the framework (goals, powers, responsibilities etc), it really isn’t clear what Robertson wants. He talks of wanting “modern tools”, but the tools our Reserve Bank uses are entirely normal. Indeed, since the OCR was introduced to New Zealand only in March 1999, it must almost count as a 21st century tool. Going into the last election, Labour did propose a (fairly weak) new tool, the variable Kiwisaver rate, but indications since have been that they were backing away from that. So what alternative tools does Robertson now have in mind?
Robertson rightly points out that inflation has not been at 2 per cent – the Bank’s target – since the current Policy Targets Agreement was signed. We didn’t have that problem previously – inflation was, if anything, typically a bit above the mid-point of the target range. That suggests the problem is not with the goal – a medium-term focus on price stability – but with the way the Reserve Bank has been handling incoming information. Quite possibly the challenges they face have intensified in recent years, but despite having full policy flexibility – never close to zero interest rates – they haven’t handled them very well. One might reasonably raise questions about that failure, and the failure of those charged with holding the Bank (and the Governor personally) to account (the Board and the Minister), but there is just no evidence that the target or the tools are the problem.
As I’ve said before, I’m not suggesting the way the Act is written is ideal, and if we started from scratch I would probably suggesting writing the goal a bit differently. But doing so would be to help articulate why we aim for something like price stability over the medium-term. It would be unlikely to make much difference at all to how policy was actually conducted. That depends primarily on the Governor and the senior advisers he gathers around him.
Better monetary policy – delivering better outcomes around 2 per cent inflation – over the last few years would have narrowed the gap between New Zealand and world interest rates, which was (temporarily) unnecessarily widened by the Governor, but it wouldn’t have closed it. That gap has been there for decades, and isn’t a reflection of how the Reserve Bank runs monetary policy. There are things that governments can – and should – do that would sustainably close the gap, but (rightly) they aren’t things the Governor or the Reserve Bank has any power over.
A previous rant on much the same subject from a few months ago is here.