The first reading of the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill is on Parliament’s order paper for today. This bill is designed primarily to give effect to the policy decisions the Minister of Finance announced a few months ago, to change the statutory objective of monetary policy, and to create a statutory Monetary Policy Committee responsible for the conduct of monetary policy (details of which were set out here and here).
There are, however, some other changes proposed. In particular, there seems to have been – at last – a recognition that the process used last year to appoint Grant Spencer as “acting Governor” was probably not lawful. The proposed amendments would deal with any similar situation (created by the timing of an election) by allowing the extension of the term of an incumbent by (or a temporary appointment for) up to six months. The ability to extend terms seems sensible (provided it can be done only once), although I’m less sure about the proposal to appoint a new person as Governor for six months. But individual vacancies should matter less under the new model (at least as regards monetary policy) because of the move to a statutory committee.
In addition, the bill sensibly proposes to remove the age limit (age 70) for the Governor. There was a strong case for some age limit with a single decisionmaker (given the extensive powers and the extreme practical difficulty of removing someone who was in clear mental decline) even if age 70 was probably now too young. With a shift to a committee decisionmaking structure (at least for monetary policy) the issue becomes somewhat less important. However, for now at least, the Governor still will wield enormous power around bank and non-bank financial regulation, so I’m not totally comfortable with the change. Higher court judges, for example, must retire at 72.
There are lots of detailed provisions in the bill. some of which are sensible, and others fairly problematic. I will be making a submission to the select committee, and so will cover many of the issues in more detail then, with the benefit of a bit more time to reflect on how the specific provisions might work.
In the rest of this post, I wanted to come back to the two big changes that are being proposed.
I’ve been sympathetic for some time to the addition of a real economy dimension to the statutory objective for monetary policy. The only case for active discretionary monetary policy is – and always has been – cyclical stabilisation. We don’t need a Reserve Bank to deliver broadly stable price levels over the longer-term, and even if we have a Reserve Bank it doesn’t need to be active. But there is a case for active monetary policy to limit the downsides from severe adverse shocks to money demand or aggregate demand – the Great Depression was the most obvious example, and indeed the backdrop to the establishment of the Reserve Bank of New Zealand. Monetary policy should do what it can, subject to a longer-term nominal constraint (eg price stability).
I’m less keen on the specific formulation in the government’s new bill
The Bank, acting through the MPC, has the function of formulating a monetary policy directed to the economic objectives of—
achieving and maintaining stability in the general level of prices over the medium term; and
supporting maximum sustainable employment.
That formulation has a number of problems:
- the whole concept of what monetary policy can do is to avoid (or keep to a minimum, consistent with price stability) periods of excess capacity. Despite Treasury’s attempt to argue otherwise in the Explanatory Note to the bill, “maximum sustainable employment” is not a measure of excess capacity. Unemployment is much closer to an excesss capacity measure.
- the wording treats employment as good in itself, whereas labour is an input (a cost, including to those who supply it) and a high-performing high productivity economy might well be one in which people preferred to work less not more. Speaking personally, as a non-participant in the labour force I feel slightly judged by the wording – as if, by not being a good Stakhanovite, I’m not doing my bit,
- the wording makes no attempt to integrate the two dimensions of the goal,
- it continues to suggest that active monetary policy is primarily about medium-term price stability. As noted earlier, we don’t need monetary policy for that goal. Instead, medium-term price stability is more like a constraint (a really important one) on the use of monetary policy to keep the economy operating close to capacity.
I’d prefer that the goal was specified as something like
“Monetary policy should aim to keep the rate of unemployment as low as possible, consistent with maintaining stability in the general level of prices over the medium-term.”
It isn’t anywhere near as radical as it might seem. The working definition of “stability in the general level of prices over the medium-term” could be kept exactly as it now (ideally, lowered a bit once the lower bound issues are resolved). But it is clearer, and better aligns with what we should look for from the Bank and the new MPC.
The Minister’s announcement a few months also (sensibly) proposed moving away from the current target-setting system (Governor and Minister agree before the Governor is appointed) to one where the Minister sets the objective and the MPC as a whole is responsible for implementing policy to give effect.
Currently, the PTA is an agreement between the Minister of Finance and the Governor. Looking forward, as the MPC will be collectively responsible for making monetary policy decisions, it would be inappropriate for the Governor to be the sole member of the MPC to agree the operational objectives for monetary policy. As a result, we are changing to a model where the Minister of Finance sets the operational objectives for monetary policy. These objectives will be set after nonbinding advice from the Reserve Bank and the Treasury (as the Minister’s advisor) is released publicly.
Unfortunately, the bill before Parliament today materially waters down the (very welcome) promise in the last sentence. Under that statement from the Minister, the operational objectives would be set only after both the Reserve Bank and the Treasury had provided advice, and that advice had been made publicly available.
In the bill itself, there is no reference to advice from Treasury, and no commitment that any such advice they proferred would be made public (although no doubt eventually an OIA request would bring it to light). The Bank is required to give advice, but that advice remains specifically that of the Governor himself. The Governor must consult with the other MPC members (but is not even specifically required to “have regard” to their views), and the Governor’s advice is now only to be published after the Minister has published the new operational objectives.
Interestingly, the bill explicitly requires public consultation by the Bank before it submits its advice on the operational objectives (“remit”), and it is required to “have regard” to those comments. But instead of the consultation requirement being cast broadly, the Bank is able to determine “the matters the Bank considers would assist it to prepare its advice”. Used wisely by a good Governor it wouldn’t be a problem, but legislation is largely about protecting the system from bad or weak individuals: in the case of a bad, weak, or just overconfident Governor, that person could deliberately rule anything s/ he found awkward out of scope when inviting public submissions. And there is no requirement that the submissions themselves should be made public – an omission that really should be corrected.
Much of the bill is about keeping as much power with the Governor as possible, while still instituting a committee. Sadly, it is probably a recipe for a fig-leaf committee, rather than for the sort of real and positive change that is needed. As just one example, although future Monetary Policy Statements will have to be approved by the MPC, the bill introduces (something I’ve previously suggested) a requirement that at least once every five years a longer-term report on the formulation and implementation of monetary policy be published. But instead of, for example, mandating the commissioning of independent assessments and evaluations, this report will be the product of the Governor alone. The Governor will be required to consult the other MPC members and “consider” the “comments (if any) of the MPC on the draft”, but not even a majority of the committee can alter the direction of the report if the Governor doesn’t agree. It is bizarre and inappropriate, but seems to reflect the Minister’s preference for a fig-leaf. Based on some of his other comments, it is not obvious that the rest of the MPC could go public even if they disagreed strongly with the Governor’s assessment.
In previous posts, I have touched on the way in which the Minister’s proposals will effectively maintain the near-complete domination of monetary policy by the Governor. Perhaps as disconcerting is that they also increase the power of the Bank’s Board – that group of unaccountable company directors and academics who’ve proved totally useless in ever holding successive Governors to account, and who have backed Governors without exception even as they have seriously overstepped the mark.
The new MPC will comprise the Governor, a single Deputy Governor, 1-2 internals, and 2-3 externals (plus a non-voting Treasury observer). By law, there must be a majority of internals. All of these people will be appointed by the Minister of Finance, at least on paper, but in reality the Minister will continue to have almost no real say over the people who wield the most powerful short-term macro policy lever. Recall that the Minister can only appoint as Governor someone whom the Board has recommended. Board members themselves may have been mainly appointed by a previous government. The same procedure will now apply to the appointment of the Deputy Governor, but in practice one would expect the Governor to have a major influence on the name put forward by the Board. The internal candidates will also be appointed by the Minister on the recommendation of the Board. The Board will be required to consult the Governor on these appointments to the MPC, but as the appointees are most likely to be people already appointed by the Governor as (say) Chief Economist or Head of Financial Markets), the Board will have not have much effective say at all.
So the Governor – who sets working conditions, and sets pay and conditions for the internals – already has his majority. But his control on the composition of the committee doesn’t stop there. Because the Minister can only appoint the handful of externals on the recommendation of the Board, the Governor himself is a member of the Board, and the Board – being non-experts themselves – is likely to be highly deferential to the Governor’s views on who should (and shouldn’t) be nominated. There is no way the Board is going to recommend someone the Governor is uncomfortable with. Good Governors will welcome challenge and diversity etc, but legislation isn’t really needed for good Governors, but for poor, weak, or insecure ones.
It is simply the wrong model. It is, as far I can see, pretty much without precedent, leaving the elected Minister of Finance no degrees of freedom over who is appointed to conduct the most important part of short-term economic management policy. We can, after all, hold the Minister to account. We do nothing about the Governor, the Deputy Governor, or the MPC members all appointed, in effect, by the unelected Governor and unelected Board. This isn’t how open and democratic societies are supposed to work. It isn’t how central banks work in other comparable democratic countries, and it isn’t how we handle appointments to other major crown entities.
I’ve argued previously that a much superior model would be:
- all members, including Governor and Deputy, appointed directly by the Minister of Finance,
- a requirement for a clear majority of external members, and
- non-binding confirmation hearings by FEC on all (external) appointees before they take office (mirroring the practice now adopted in the UK for the Bank of England MPC).
The amendment bill Parliament will be considering today does not really deal with the communications procedures etc that are envisaged – most of that is delegated to a charter to be determined later. The Minister has, however, already indicated that his bias is towards a system where decisions are reached by consensus if possible, and that although minutes will have to published, there would be no identification of individual dissenting votes or any ability for MPC members to openly express their own views on monetary policy and economic issues. That will suit the Governor, but won’t advance the cause of good policymaking or of an open and accountable central bank. The charters are supposed to be agreed between the Minister and the MPC (recall that the Governor will almost always have a built-in majority) but the bill provides that the first such charter – from which it will be hard to deviate much for a long time – will be agreed not with the first MPC but just between the Governor and the Minister. No doubt, the Governor will ensure his personal and institutional interests are served. Will the Minister care enough to look to the interests of the wider process and of the public? (And will the Governor still be able to talk openly about climate change policy, infrastructure, capital gains taxes etc, and if he, then what about the rest of the committee, for whom monetary policy won’t be a fulltime job.)
As I said, this bill further increases the power of the Board. Another example – extraordinarily so given the Board’s own shocking record – is that the Board will be required to approve a code of conduct for MPC members. But instead of discussing those arrangements and provisions with the first MPC members, the bill provides for the Governor and the Board to cook up the code of conduct themselves, no doubt reflecting the interests and preferences of the Governor.
As for Board’s capability and credibility in this area, well where do I start? In just the last couple of years:
- they’ve backed the Governor in attacking a member of the public who brought to light a leak in an OCR annoucement,
- they’ve backed the Governor is his attack on, and attempt to muzzle, BNZ’s chief economist,
- they’ve demonstrated a flagrant disregard for the provisions of the Public Records Act (maintaining no minutes of any meetings involving the appointment of the new Governor),
- they confirmed that they had provided no written advice to the Governor in recent years at all,
- they have shown no sign of interest in resolving serious misconduct issues in a superannuation scheme they have considerable legal responsibility for.
- their own code of conduct, when finally revealed, proved to have no conflict of interest provisions at all,
- they seem to have no interest in acting to keep the current Governor on reservation, and
- just this week, their chair has attempted to assert that Chatham House rules trump the Official Information Act.
A supine, lawless group. Just the sort of people you would look to for leadership in this area….. But, no doubt, just the sort of people who can be relied on to do the Governor’s bidding and avoid any openness, challenge, or serious scrutiny. In fact, who can be relied on the ensure that the new MPC is little more than a figleaf. One has to wonder who will be willing to accept appointment, for anything other than the status, the pay or perhaps just academic curiousity. Those aren’t the sort of motives we need in a revamped Reserve Bank.
All in all, this legislation falls far short of what could, and should, have been. The Governor should be a CEO servicing and supporting (and chairing) an open and accountable, ministerially appointed committee. Instead, his empire – his dominance – will be intact. It cements in the victory for the Bank establishment, and for the Governor personally. I haven’t yet written about Stage 2 of the review now underway, but the possibility of good outcomes from that process took a big step back when the Minister agreed that the review would be jointly done by the Bank and Treasury (which side is going to be more motivated to fight its corner?) reinforced when it emerged that the review process is being led by a (seconded) member of the Reserve Bank’s own senior management team, who will have his own future, working for the Governor, to look to.