On the new PTA

The last ever Policy Targets Agreement was released this morning, signed by the incoming Governor and the Minister of Finance.  With it came the decisions the government has made on reforms to the legislative framework governing monetary policy (decision makers, governance, transparency etc).  We are now finally getting past the year in which first the outgoing Governor was a lame-duck, and then the period when there was no lawful “acting Governor” or lawful “Policy Targets Agreement” –  and even if you did regard both as lawful, they were no better than caretakers.   With the government’s planned reforms such an unfortunate hiatus should never happen again (as it doesn’t happen abroad).

The Policy Targets Agreement is the key document in short-term macroeconomic management in New Zealand: it is the mandate for the Governor in his role as single decisionmaker on monetary policy, and monetary policy is the active tool for short-term economic stabilisation.   This one isn’t expected to have a long life.  Once the new legislation is in place –  scheduled for next year –  the Policy Targets Agreement will be replaced by a mechanism in which the Minister of Finance unilaterally sets the operational objectives for monetary policy (the UK system), although only after receiving (published) advice from the Reserve Bank and the Treasury.   That is a welcome change –  not only does it put responsibility for goal-setting firmly where it belongs (with elected ministers) but it removes the awkward aspect of the current system, in which an incoming Governor has had to agree targets (sometimes dealing with quite technical points) before being appointed, and often with only limited staff advice.   It was also a necessary change once a committee, with evolving membership –  rather than a single individual –  was made responsible for monetary policy.

The new (shortlived) Policy Targets Agreement has a few changes, although mostly not of great substance.

  • there is an even longer statement of the government’s political aspirations (‘inclusive economy”, “low carbon economy”, an economy that “reduces inequality and poverty”) none of which has anything to do with monetary policy.  Closer to economic policy, there are worthy aspiration (“a strong diversified export base”) which monetary policy can’t do anything about, and government policy isn’t doing anything about.
  • the substance of the document has been shortened a bit, but mostly not in a good way.  For example,
    • if I welcome the deletion of the reference to asset prices added in 2012, I’m uneasy about removing the explicit expectation that in monitoring inflation the Bank shouldn’t just look at the headline CPI.
    • And perhaps it isn’t of much substance, but I’m interested that they chose to remove “average” from the requirement that policy “focus on keeping future inflation near the 2 per cent mid-point”.
    • And I am a little uneasy about the removal of the list of the sorts of event/shocks that might justifiably warrant inflation being away from target, and the removal of the requirement to explain, when inflation is outside the target range, what they are doing to ensure that future inflation remains consistent with the target.  At the margin, it slightly weakens formal accountability (weak enough in practice anyway) and –  in the current climate –  may weaken the impetus to get core inflation back to 2 per cent (after so many years),
  • there are several changes relating to the new employment aspect of the objective (which, contrary to Arthur Grimes, I consider neither ‘disastrous’ nor ‘crazy’, and which risk being more feeble and virtue-signalling in nature than anything else).
    • at a high level there is an expectation that “the conduct of monetary policy will….contribute to supporting maximum sustainable employment”,
    • adding “employment” to the list of in the provision requiring the Governor to seek to avoid “unncessary instability”, and
    • a requirement to explain in Monetary Policy Statements how “current” monetary policy decisions contribute to “maximum levels of sustainable employment”

Quite what, if any difference, these provisions make will really depend on the new Governor’s assessment.   His press release suggests no difference at all

Mr Orr said that the PTA also recognises the role of monetary policy in contributing to supporting maximum sustainable employment, as will be captured formally in an amendment Bill in coming months.

In other words, just formalising what is already there.  An approach that, not incidentally, delivered us an unemployment rate materially above the NAIRU –  on the Bank’s own numbers –  for most of the last decade.   At present, we can probably expect lots of rhetoric –  repeated references to the contribution the Bank is making –  and nothing of substance, although in fairness it may be hard to tell for some time (since the unemployment rate is now closer to a true NAIRU than it has been for some considerable time).  It will be interesting to see the Governor’s first MPS and the associated press conference.

Personally, I’d have preferred that the new requirements were specified in terms of unemployment –  explicitly an excess capacity measure. There probably isn’t a great deal in the issue, except that the current formulation tends to treat high rates of employment as a “good thing”, when there is little economic foundation to such a proposition. By contrast, minimising (sustainably) the rate of unemployment is more unambiguously a “good thing”.

Perhaps more disappointingly, it is fine to require the Bank to explain how current monetary policy decisions are contributing to maximum sustainable employment.  But that is the sort of obligation an undergraduate student of economics could meet without difficulty and without much substance.  It is unfortunate that the Bank is not being required to:

  • explain how past monetary policy decisions have actually contributed to maximum sustainable employment,
  • explain how its future monetary policy plans will do so (the Act requires the Bank to explain policy plans for the (rolling) next five years),
  • publish estimates of the maximum sustainable level of employment.

Finally, with the OCR at 1.75 per cent and the current economic expansion having run for eight or nine years, it is disappointing that the Minister and incoming Governor have not signalled anything about the importance of preparing for the next recession, and reducing the extent to which the near-zero lower bound (inability to take the OCR below about -0.75 per cent) could severely limit the capacity of the Reserve Bank to maintain price stability (or contribute to maximum sustainable employment) in the next recession.  That recession  –  timing unknown of course –  remains much the biggest threat of unnecessarily high unemployment.  And yet it still doesn’t seem to be being taken seriously.

I’ll do a separate post on the planned legislative reforms.   For now, suffice to say that if it is a small step in the right direction, it is a big win for the Reserve Bank establishment.

8 thoughts on “On the new PTA

  1. I’m not sure what you were expecting Michael. If the PTA is anything like how Ministers set out their goals for the current parliamentary term in a letter to the PM, they are written by Ministry officials and reflect the desire of officials to keep working on whatever they were working on before, with perhaps a pink or sky blue tinge added to make them look genuine.


    • Wheeler a lameduck? I don’t think the range of changes he put in can be considered a lameduck approach.

      1. Pushing interest rates upwards and then reversing twice. Wheeler was initially rather trigger happy trying to be the first OECD country to be raising interest rates. Realised his mistake and backed down which was more than I can say of Allan Bollard that drove the NZ economy into a deep recession and only backed down after he attended a Global Central Bank meeting and suddenly realised that there was a GFC. But by then the destruction of the NZ economy was a big mess with the entire building sector and the risk finance industry totally decimated.

      2. Initially Wheeler toe dipped a new equity LVR restriction based on Auckland alone and when that did not work and the contagion spread he looked at John Key and with John Key’s public approval to get on with it, he dumped a 40% equity LVR across NZ whcih effectively slowed the investor buying activity to a crawl.

      3. Behind the scenes they tightened bank credit approvals using the banks banking license as a bludgeon and they were tough with banks with threats behind the scene. Perhaps taking it too far at times with personal attacks on say Stephen Topliss of Westpac. I did think that the RBNZ was far too bank friendly in the past especially between 2002 to 2007, low documentation loans was increasingly popular even as the RBNZ was raising interest rates, bank credit availability was loosened instead of tightened which meant that interest rates had to go even higher.


      • Even the last 6 months of Wheelers term the equity restriction of 40% on LVR was still in play. Monetary policy OCR was held steady at 1.75% when it looks like it should actually go lower.. Still a very tough and hawkish RB Governor in the face of 6 years of inflation at the lower end of 1%. Credit availability is tough right to his departure.

        My problem with the RBNZ is the lack of research as to what the conditions are to introduce the LVR rules and when to lift it. There does not seem to be any rules other than the RB governors discretion.

        Dropping the OCR has no impact when credit availability is tightened at the same time. Even though Grant Spencer reduced illegally the equity restriction to 35% on LVR in January 2018. He also tightened banks lending behind the scenes I am told by bank officers by 15%.


  2. NAIRU – is an acronym for non-accelerating inflation rate of unemployment, and refers to a level of unemployment below which inflation rises.

    But unemployment is not spread evenly by location or by industry. So a policy that increases the need for IT engineers may trigger wage inflation but not a policy that has a similar demand for say cleaners. A policy that makes a large exporting business expand will effect both IT staff and cleaners but expanding industries such as tourism and horticulture may absorb proportionally more under-employed low skilled staff.

    Then there are welfare benefits: a working mother with young children reluctance to increase hours of part time work will be effected by WFF and housing allowance – adjustments in benefits can change incentives. [Hence my plea to return to generous universal child benefit.] Benefits are out of RBNZ control but will change NAIRU.

    Employment objectives: “” more feeble and virtue-signalling in nature in nature than anything else “”.


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