Joyce requests review of Reserve Bank governance structure

Some will have seen Hamish Rutherford’s Stuff article reporting on the review the Minister of Finance has commissioned (to be undertaken by former State Services Commissioner, and former Treasury deputy secretary  responsible for macroeconomics,) Iain Rennie) on two aspects of Reserve Bank governance:

  • whether something like the existing internal committee in which the Governor makes his OCR decisions should be formalised in legislation, and
  • whether the Reserve Bank should remain the “owner” of the various pieces of legislation (RB Act, as well as the insurance and non-bank legislation) it operates under.

This is very welcome news.  As I noted in a post a couple of months ago on governance issues,  Steven Joyce has previously been on-record less averse than some to changing the model.


Who knows if the new Minister of Finance is interested, but flicking through some old posts, I was encouraged to find one from September 2015, reporting an exchange in the House between then Associate Minister of Finance Steven Joyce and the Greens then finance spokesperson Julie Anne Genter.  In response to a question on governance, Joyce responded

Hon STEVEN JOYCE : The suggestion that the member makes, of having a panel of people making the decision, is, I have to say, not the silliest suggestion in monetary policy we have heard from the Greens over the years, and many countries—

A backhanded dig at the Greens at one level, but not an outright dismissal by any means.

And with the Governor confirming that he is leaving in September, and a year now until a permanent new Governor is in place, it is good time to have such a review, so as to be open to the possibility of reform, including in discussion with potential candidates for Governor.   Treasury tried to interest the previous Minister of Finance in legislative reform before Graeme Wheeler was appointed, but were knocked back (even though Treasury had found support for reform from market economists).   Graeme Wheeler also sought to initiate reform –  legislating for his Governning Committee –  in 2013 (although he still keeps all the relevant papers hush-hush), and was also knocked back by the Minister of Finance.  So, I’m encouraged that Steven Joyce has initiated the review.

That said, it is a pretty small step.  Iain Rennie will bring some relevant background to the issue, although his track record as State Services Commissioner might not command much confidence in circles other than those who appointed him.  And the Minister of Finance is not committing the National Party to supporting change.  But with almost all other political parties favouring change, and Rennie likely to point out the simple fact that no other New Zealand public sector entity is governed the way the Reserve Bank is (all power formally in one official’s hands), and no other central bank and financial regulatory agency in other advanced countries puts so much power (monetary policy and banking etc regulation) in one person’s hand, it is likely to set in place momentum leading towards some legislative reform next year.

I spoke to Rutherford about this yesterday and am quoted in the article

Michael Reddell, a former special advisor to the Reserve Bank who says he sat on a committee on OCR decisions for 20 years, said formalising the current structure would make only a marginal difference, as the members all reported to the governor.

“If your pay and rations are determined by the governor, then the extent that you’re willing to stand up is questionable, particularly to a tyrannical governor,” Reddell said.

“If the minister [of finance] were appointing the people on the committee, it would be a material step forward.”

All three Governors who have operated under the current legislation have operated pretty collegially.  For a long time, the OCR Advisory Group (OCRAG) was the forum in which the Governor took formal written advice and recommendation, and then made his decision (I was part of that group for a long time).  Mostly his decision was in line with the (usually) clear-cut majorities of advice.  All members of that committee were appointed by the Governor, including two external advisers.   The current Governor has put in another layer of hierarchy, taking advice from a wider group and then making his decision in a smaller group (him, his two deputies and the chief economist).

I should stress that the reference to “tyrannical” Governors was not intended as a reflection on anyone who has served as Governor.    But you need to design institutions around poor or insecure Governors: good ones will want, and will encourage, debate and alternative perspectives.  Poor ones will squash it, and if they control all the members of the statutory committee, it offers little or no protection  –  and actually puts monetary policy decisionmakers at a further remove from the voters and Minister of Finance.   As I’ve argued previously, we need more involvement of the Minister in appointing monetary policy (and financial regulation) decisionmakers, and also need external perspectives brought into the process, in the form of full formal participation in the decisionmaking.  As, for example, it is in Australia, Canada, the UK, the US, Sweden and so on.

Rutherford’s report doesn’t say whether the Rennie review will also look at the formal decisionmaking structure for financial regulation.  Those issues will have to be considered in any legislative reform, and it is probably more important to get collective and external decisionmaking processes formalised, since in these areas the Bank does not operate to something like the PTA, but rather exercises huge amounts of barely-fettered discretion.

The second half of the review –  looking at whether the Bank should stay responsible for its legislation – is not one of the (long list) of reform issues I’ve focused on.  It will probably have many people at the Reserve Bank spitting tacks, and looking at all sorts of bureaucratic tactics to retain something as close as possible to the status quo.  I favour change (but will openly acknowledge that until perhaps the last five years I had the same insider hubris that affects many RBers –  a belief that “we are different” and no one else in positioned to do the legislation-ownership role well).  That is simply wrong –  and if the expertise isn’t there right now, it could be developed over time (probably in Treasury) without too much difficulty.  Again, it would bring the Reserve Bank into line with other Crown entity types of bodies, few (if any) of which are now responsible for their own legislation (altho in years gone by some important ones –  eg ACC – were).  It might seem to many readers like an “inside the Beltway” issues, that doesn’t really matter to citizens.  That would be a mistaken view.  Reform in this area is just one part of the overall agenda to improve the accountability of the now very-powerful Reserve Bank, and bring its goverance more into line with that for other Crown agencies, and with central banks and financial regulatory agencies abroad.

And so for the second time this week, I commend Steven Joyce.  It is only an unambitious start, but the start matters.







9 thoughts on “Joyce requests review of Reserve Bank governance structure

  1. At least an acknowledgement that there is a need to consider the way things are done.

    Great start thanks to you Micheal.


  2. I think that you are right that they should be considering a board of decision makers, where the board is chosen by the finance minister, so they don’t have to answer to the governor. However boards create other challenges, most notably around communication, especially when there is a difference in views. If board members are allowed to view their opinions publicly and there is some variation in these opinions, then this can create some confusion. You just need to look at the US where each regional fed governor can give speeches that hint at the future fed funds rate, and the confusion that is sewn. Sweden is another example, where the previous deputy governor and monetary policy committee member, Lars Svensson, was publicly at odds with the governor. This situation was made worse by the fact that Lars is a highly respected and published academic and more famous/respected than the governor. There are also issues around ownership of the forecasts. For this reason the Bank of England publishes the implied market expectations for the policy rate, rather than an endogenous path. Disagreement between members would make it difficult to agree on the interest rate path. I believe the governor of Norges Bank takes ownership of the forecasts, in which case the endogenous interest rate path reflects his views. Although this approach does not necessarily reflect the collective opinion of the board, and the expected interest rate path of the board.


    • Yes, there would be lots of details to be resolved with any legislative changes, even just cementing into legislation the current de facto practices.

      I don’t think having members expressing a variety of views – it just represents the reality of uncertainty and the realistic range of views – but any such Board would need some understandings about eg treating each other respectfully in public. On the interest rate track, I prefer the BOE approach anyway (and used to argue for it internally). The issue of agreement on forecasts is less important than it sometimes seems, because in reality central banks mostly make decisions on where ther economy is now, not on where it might be 2 years hence (thus the Taylor rule was historically a reasonable description of central bank actions). I’ve argued that the OCR release should be separated from the publication of forecasrts – again as was long the approach at the BOE.


  3. All 3 governors may have been collegial but they have been very tyrannical towards the NZ economy with wildly fluctuating interest rates regime. Rapid interest rate increases was the norm. There seems to be complete ignorance that rapid interest rate increases has on the general economy, damaging jobs, pushing up the NZD and wrecking profitability for businesses.


  4. I find myself agreeing with Grant Robertson today on Q&A that the unemployment number and the general well being of the economy must be considered within the mandate of the RBNZ. No point keeping inflation within a narrow range at the expense of crippling the entire economy and engineering a recession.

    But he lost me when he talks about taxing property speculation. The Bright Line test is an expansion of the Intent Test There has always been a tax on speculation in property. There is however no tax on speculation on share trading. So he is just being wrong and misleading. The Bright line test should be extended to share trading to be fair. I guess thats where he is saying that is the so called productive economy. Thats the problem with a Labour top lineup at the moment no financial or tax knowledge and no professional skills.


    • The bright line test was the result from a desperate RB governor, Wheeler putting pressure on the government, seeking a form of tax on speculation. This sort of poorly researched comment from the RB just shows how professionals are negligent when they comment on areas they have zero understanding nor training on.

      Since when have higher taxes led to lower prices on products? All higher taxes do is to put up barriers to selling which increases prices. Efficient markets lower prices which means fewer barriers. In a supply constraint market more barriers equates directly to higher prices.


      • Auckland housing an efficient market? Buyers intending occupation are assuming prices will not fall dramatically and buyers of rental properties are mainly betting on prices ever increasing. “Mainly” because there are some city apartments that have a return that is better than putting your money in a bank term deposit. I know because last year needing some cash I sold one. Most buyers are taking a gamble.
        The rules imposed by the RB have been to protect the banks but they have taken a little steam out of a crazy market.


      • Any investment or business is a gamble. But usually a calculated gamble weighing the risk versus rewards. Efficient markets lower prices. I did not say that Auckland is an efficient market. Auckland is a highly regulated property market. It has a supply issue due to the huge amount of regulation. RMA, Viewshafts, Queens Chain, height to boundaries and lack proper infrastructure. The infrastructure is inadequate and aging, and developers have to pay for public infrastructure. The geography is daunting with beaches, coves, rivers, hills and valleys.

        There are already a myriad of taxes on property. Rates, Development Levies, Land tax due to zoning changes, Bright Line Test and also Non residest wiholding Tax on Non resident buyers, and also a speculation tax based on intent. Each tax is an input cost.

        When a person buys and sells property as a business, called a speculator but for all intents and purposes they are in it as a business. There are input costs, labour, materials, marketing, interest, tax and GST. The Output is of course the eventual sales price to a home owner. Therefore the driver of prices is not the speculator but the eventual home owner who would buy on emotion. A speculator looks for profit after input costs and buys on logic.


  5. “Iain Rennie will bring some relevant background to the issue, although his track record as State Services Commissioner might not command much confidence in circles other than those who appointed him. ”



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s