Next week will bring the first Reserve Bank Monetary Policy Statement of the year. It will be the last –  after 29 years – prepared solely on the responsibility of a single individual, the Governor.     He gets to make one more OCR decision on his own and then on 1 April the new statutory Monetary Policy Committee –  established under legislation passed just before Christmas – takes over.   It is an apt date given that the new regime is designed to have the appearance of being a significant reform but is in fact likely to do little to reduce the undue dominance of a single unelected official, the Governor.   In this case, a Governor who after almost 11 months in office hasn’t managed to make a single on-the-record speech about what is still (for a few more weeks) his primary function, monetary policy (and the associated cyclical economic position).

The first OCR decision to be made by the new Monetary Policy Committee is not scheduled until May, but we can expect some important announcements in the next couple of weeks.

Under the amended legislation, there is a raft of new formal documents required.

The most important of them is the “remit”.   This replaces the Policy Targets Agreement framework, and is the mechanism that tells the Monetary Policy Committee what specific targets to pursue.

On an ongoing basis, the remit will be set directly by the Minister of Finance –  it won’t need to be agreed by the Governor or the MPC.   The Bank will have to provide advice about the possible content of the remit, and in providing that advice the Governor is required to (a) consult with the MPC, and (b) seek input from members of the public.

But those provisions don’t apply at all to the first remit.  Under the legislation, the remit is required to be agreed by the Governor and the Minister, with no input from either the public or the MPC members.  It is also supposed to be published within two months of the royal assent having been given to the legislation, which means it will almost certainly be published by 20 February.  (There is provision for the Minister to issue a remit directly if the Governor and Minister can’t reach agreement in that time, but that seems very unlikely –  it would be in neither side’s interest to allow it to happen, even if there were some differences between them.)  As there have been no hints suggesting, or preparing the ground for, anything else, I expect the first remit will have substantive content very similar to the existing Policy Targets Agreement signed when the Governor was appointed last year.

The second new document is the “charter”.  The charter is supposed to cover issues around transparency, accountability, and decisionmaking procedures for the MPC, and is required to include provisions around recording and publishing minutes of meetings.  On an ongoing basis, the charter is agreed between the Minister and the MPC as a whole. But the first charter –  which will set the terms for how the MPC first operates, and as the default operating model will be hard to deviate from  –  is to be implemented simply by agreement between the Governor and the Minister.  It is also supposed to be published by 20 February.  There is no public consultation, and no consultation with MPC members either –  who haven’t been appointed yet. They will, presumably, just be offered a “take it or leave it”.   We know the Minister’s predilections in this area –  highly summarised minutes only –  and the Bank’s previous biases against any sense of individual accountability or responsibility –  but it will be interesting to see how restrictively the document is worded. I’m not optimistic.

The third document is the “code of conduct” for the MPC (particularly as it will affect the external part-time members).  This is approved by the Bank’s Board, rather than the Minister.  It also has to be published by 20 February.   In fact, the Bank (the Governor) –  the only people allowed input here –  was required to prepare the code and submit it to the Board by 20 January.   I presume that what emerges will be reasonably sensible, but there was considerable work needing to be done on the draft code of conduct that was around at the time the Board was advertising for MPC candidates last year (when, as I recall it, activities like writing a blog or newsletter on matters macroeconomic would not have been a problem).

So within the next two weeks, we can expect to see that suite of documents published.  Even if they aren’t released before the Monetary Policy Statement next week, it would be reasonable to expect the Governor to be asked about them at his press conference.  After all next week MPS (whatever the talk about future monetary policy) isn’t at all binding about the future: the decisionmakers will ( in principle) be different, and so will the rules under which they will be working.   In principle, the transition to a new regime ushers in a period of some greater uncertainty about monetary policy decisions and (in particular) around monetary policy communications.

The biggest uncertainty, however, is about the membership of the Monetary Policy Committee.  You will recall that under the new legislation there is required to be a majority of internal (executive) members.  Indications have been that there will be four executive members, and three part-time non-executive members, plus the Treasury observer.   These appointments are formally made by the Minister of Finance, but he can only appoint people nominated by the Bank’s Board, and they in turn are likely to be heavily influenced by the Governor (who is a member of the Board, and the only Board member who knows anything much about monetary policy).

Even on the executive side, there is some uncertainty.  The Governor will be a member, and chair, as we can safely presume will the Deputy Governor, Geoff Bascand.   The newly appointed Assistant Governor for monetary policy and financial markets, Christian Hawkesby, seems certain to get one of the appointments (he’d hardly have taken the job without that sort of assurance), and the fourth slot is likely to be reserved for the chief economist.  The Bank is advertising that position at present, and unless there is an internal appointment it might be a stretch to even have someone in place by  1 April.   Under the new legislation, there is also a non-voting Treasury observer.  Since Gabs Makhlouf leaves office in a few months, that is additional (minor) source of uncertainty around how the MPC will function.  We wouldn’t expect the Secretary to have enough time to spare (or regard it as a priority) to take the role themselves (although in the transition Makhlouf has), but we also don’t know who will be nominated and quite what role they will play.

And what of the non-executives?  As I’ve noted before, these are positions that involve a significant commitment of time (they advertised for 50 days a year), and yet there will inevitably be quite significant constraints on what other activities such appointees can take on, and 50 days out at the Reserve Bank doesn’t fit easily with most other full-time jobs.  New Zealand government boards and committees don’t typically pay that well either.  But the biggest obstacle to getting decent people, who will be able to make an effective contribution, is the neutered nature of the role.     The non-executives will always be a minority of the committee.  They won’t, we are told, be able to give speeches or interviews about the economy or monetary policy (unlike, say, peers in the UK, US, or Sweden). They won’t, so far as we know, have any dedicated research or analysis resources –  and at one stage last year the Governor was talking about how he didn’t want economists anyway.  And if they disagree with the majority view, they won’t even able to make their case openly, and have that identified dissent (and the reasons for it) on record.      And they’ll be appointed by the Board, with key input from the Governor, and we know that the Board has long operated to protect the Governor.  There is little likelihood that anyone remotely awkward will be appointed.  The sort of people who might actually add value are unlikely to be seriously interested, given the way the system has been set up.

And they face the executive members.   They work closely together all the time.  And each of them work for and to the Governor (who also controls salaries and internal resource allocation).  In fact, both Hawkesby and the new chief economist will have been directly and personally chosen by the Governor, a Governor not known for welcoming challenge or dissent.  It would be a surprise if the internal members don’t maintain a pretty solid bloc vote almost all the time.  If they were a group of people with compelling skills in economic analysis and policy that might usually work okay (if being less than ideal), but by the standards of many overseas central banks the executive team itself looks under strength.

It is still anyone’s guess who they will find for these positions. But I did have a response the other day to an OIA request I had lodged last year about people being considered for MPC positions.  I had the first part of the response last year, about the applicants, but this latest response was about the second part of my request, about people who the Board had taken more seriously.  This is what I got from them

Your 23 October request under section 12 of the Official Information Act (the OIA) stated a willingness to split the response into two parts if timing of the process made this necessary. The Reserve Bank provided a response to the first part of your request on 20 November. In the final part of your request you sought:

. . . information on the applicants for the external MPC roles, (as advertised, applications having closed on 7 Sept 2018):

• the number of applications taken further (not just immediately set aside as clearly unsuitable/unacceptable by the Board or its agents;
• the proportion of those applications taken further from (a) women (as best you can tell), (b) people currently resident in New Zealand, and (c) people currently employed at a university.

In response to the information requested in the bullet points above: nine applicants have been taken to the stage of final consideration. Of the nine, two are women, all are New Zealand resident, and one is currently employed at a university.

I was interested to learn that all those at the final stage of consideration for appointment are New Zealand residents.   There has long been a reasonable argument that the Reserve Bank could benefit from having someone from overseas on the committee, especially in view of the limited pool of potential high quality, available, candidates here.  It wasn’t obvious that the role would be particularly attractive, given the institutional design (see above) and New Zealand remuneration rates.  And so it seems to have proved.

Even with the weak statutory framework, the new MPC could have been a materially useful step forward, with a Governor and Minister who were seriously committed to greater openness and accountability, and a serious contest of ideas.  But, of course, if that were Grant Robertson and Adrian Orr, we wouldn’t have the law written as it is.  My working hypothesis has long been that the Minister and Governor want to have things look a bit different without actually being materially different at all.  Perhaps they will get one good external (at least first time round), but that person will either find it frustrating, or will just settle in to being a bit player, an honorary members of the Bank’s Economics Department.  Most likely, it will end up a lot like the system in place now for almost 20 years, when there have been a couple of part-time external advisers to the (internal) Monetary Policy Committee.  Most were business people – although a couple were trained economists –  who sat through all the meetings, provided business anecdotes and perspectives (some genuinely useful) but who had little real impact, and often found it all rather frustrating.   For them, at best it was probably an interesting experience, a diversion from the day job.  Even allowing for the statutory nature of the new positions, I don’t really expect things to be much different in future.  After all, like the current advisers, these new people will be selected at the Governor’s choosing, with a strong emphasis on “all working together”, while the Governor –  a Governor known for sounding off on all manner of things – is the only public face.

There are also some other unsatisfactory aspects of the new law.  The MPC is responsible for the content of future Monetary Policy Statements, but not for the new five-yearly reviews of monetary policy –  those are the Governor’s responsibility (surely any worthwhile review would primarily be done by outsiders, commissioned by Treasury or the Minister?).  And as I’ve noted before what the Act makes the MPC responsible for is drawn very narrowly.  It will work okay while monetary policy involves OCR adjustments, but it is much less clear that the MPC will have an effective (statutorily-based) say in the deployment of any unconventional instruments that may become necessary if the OCR hits the practical lower bound.  Parliament should have given the MPC responsibility for all matters relating to monetary policy, with the MPC able to then delegate to the Governor some operational matters.    They’d have done so if this legislation were much other than a cover for something little different than the status quo, where the Governor runs the show –  somthing like prosecutor, judge, jury, and appeal court in his own case.  In an open democratic society, no one individual should have that much untrammelled power, and certainly not an unelected person.

Perhaps some of you will be thinking that none of this much matters, as the Reserve Bank has done an adequate job.  Personally, I would dispute that –  and “adequate” –  shouldn’t be the standard we look for – but more importantly, I’d argue that key government institutions should be designed to promote substantive accountability, high levels of transparency, minimising single person exposures, and promoting the contest of ideas and evidence (in areas characterised by huge uncertainty).  These reforms look like just papering over the cracks.

This is one of those issues on which I’d like to be proved wrong. Perhaps I’ll be pleasantly surprised and a succession of high quality appointments will hope make these reforms one that make a real difference. But I’m not holding my breath.

(On another matter, scrolling for various websites yesterday I found someone linking to a post I’d written back in 2017.  I wasn’t quite sure why, but then I noticed that they were actually retweeting something from a Twitter handle called croakingcassandraredux.  Someone, unknown to me, has started a Twitter account describing itself as “Michael Reddell’s alter ego”, a “public service venture” intending to give a wider audience to my material by tweeting links to various posts.   I guess readers here have already found me, and anyone who wants can sign up to get the posts by email, but if the account is any use here is the link. )