Consulting on the Remit

The Reserve Bank Monetary Policy Committee works to a “Remit” set down for them from time to time by the Minister of Finance (the current one is here). It is a different (and better) system than the previous approach of Policy Targets Agreements between the Governor and the Minister, and in particular makes it clear (as is appropriate in our system of government) that the (elected) Minister and government set the targets for monetary policy, while the MPC is the accountable (at least on paper) body responsible for setting monetary policy to deliver the government’s goal.

Under the Reserve Bank Act the law now reads

And several weeks ago the Bank kicked off the first stage in a consultative process designed to inform the advice they will eventually provide to the Minister of Finance. If you want to have a say, submissions close next Friday (15th).

Consultation with the public (of some sort or other) is required by law.

The idea of this sort of five-yearly review appears to have been drawn from the Canadian process, where in the lead-up to the five-yearly review of their inflation target the Bank of Canada has done a huge amount of analytical work reviewing the issues and options. Now, Canada is a much bigger country than New Zealand – but it is still one country, with its own set of specific experiences and issues – but the range of material they have put out, and research they have undertaken, is typically very impressive. Here is the link to the most recent review, and here specifically the link to the 24 formal research papers.

By contrast, what we have seen so far from the Reserve Bank of New Zealand is a pale shadow. There is a 60 page document, but lots of graphics, but there is no fresh analysis or research at all. It is possible that this first round consultation is designed simply to draw out the questions people think should be looked at more closely, but even if so that doesn’t leave much time before the second stage of the consultation is due (I think they said October or November). It really doesn’t look as though they have in mind doing much, if any, fresh research, whether commissioned or by their own staff. Against the backdrop of some of the biggest disruptions to monetary policy in the 30+ year history of inflation targeting, that suggests a lack of real seriousness about the review. Perhaps the Minister has already suggested (see 5(2)(c) above that he isn’t interested in much, but there is no hint in the document of such an external constraint. It has the feel more of the diminished Reserve Bank we’ve seen over and over again in the last few years – little published research, weak senior appointments (remember the marketing executive now responsible for macroeconomics, monetary policy and markets), and resources spent on (eg) comms staff, “stakeholder liaison”, and climate change, rather than on core areas of Bank responsibility.

As the review of the Reserve Bank legislation has proceeded I’ve observed on a number of occasions, including in submissions to FEC, that there are aspects of the new legislation that are a mess. The Remit review process, especially coming against the backdrop of the new Board announced last week, helps illustrate some of the problems.

Who is responsible for this Remit review advice? Why, “the Bank”. And “the Bank” here clearly does not include the Monetary Policy Committee, since (as you can see in the extract above) “the Bank” is required to consult the MPC before the advice is given to the Minister. And “consult” (standing alone) is about as weak as legislation gets: you can see by contrast that ‘the Bank’ is required to “consult and have regard to” (a materially stronger standard) the views of the public.

It is simply weird. We have a dedicated Monetary Policy Committee responsible for the formulation of monetary policy and working to carry out the current Remit, but they are treated (by the legislation) as distinctly marginal to the entire review process. There is no obligation on them to provide analysis and advice to the Minister, and “the Bank” is not even required – although it may choose to – to have regard to comments the MPC members might have on “the Bank’s” proposed advice or analysis.

Now, of course, the MPC is dominated by management anyway (the law requires a majority of executive members, each of whom owe their position. departmental resources etc to the Governor) but there are the three external members, and on a good day the Minister and The Treasury will try to tell us they have a valuable contribution to make to the monetary policy formulation process (on other days, the Minister will repeat the blackball he and Orr and Quigley put in place whereby anyone with current or future expertise and research agendas in areas relevant to monetary policy is automatically disqualified from serving on the MPC).

By construction, management always has the numbers so long as they stick together, but wouldn’t a much more sensible approach to have been to have made the MPC responsible for the Remit advice to the Minister, drawing on expertise and perspectives from both staff and outsiders?

The current structure seems especially problematic when one remembers who “the Bank” is. Until last week, unless otherwise stated (ie around the MPC) it was the Governor. But now it is the Board – the same Board of ill-qualified, in some cases conflicted, people I wrote about last week. Not one of the non-executive members of the Board has any experience or demonstrated expertise in monetary policy or macroeconomics. I guess in reality they will delegate it all to the Governor….but delegating such a major issue (or just putting it through the Board with no serious scrutiny or discussion) makes a mockery of the new governance structure.

(Amazingly, if the Minister – this one or a new one – wishes to change the Remit, the law requires consultation (but not “have regard to”) with “the Bank” but not at all with the MPC, who really do seem to be there mainly to make up numbers and eat their lunch (creating in 2018 the illusion of reform over the substance).)

As I noted earlier, there was no fresh analysis or research in the consultative document. What particularly caught my eye was that there was no attempt at a rigorous or systematic review of how monetary policy has been conducted, under the current Remit, in the last 2.5 turbulent years, in which the Bank has run up massive losses and seen (core) inflation blow out. I attended an online consultation session a few weeks ago and I raised this with staff. They told me that there is such a review underway, and they will even have it externally reviewed, but observed that they could not promise it would even be available before the next round of consultation on the Remit advice. That seems far short of adequate, even if your prior is (as mine currently is) that the specification of the Remit probably doesn’t explain a lot about what went wrong.

The Act requires that a review of monetary policy be undertaken (by “the Bank”) every five years or so, and perhaps the current exercise they have underway is the first of these reviews.

But again note how marginal the MPC is (must be consulted – apparently late in the process (“on a draft”) – but no obligation to have regard to their comments). And meanwhile responsibility for the review rests not with the MPC, but with that generic ill-qualified Board. There might be a certain logic in an independent review (done by proper external reviewers) but it is just a weird model – explicable only by a desire to preserve the Governor’s absolute dominance – to marginalise the MPC (who actually had responsibility, and so some self-scrutiny and reflection could be of value), while leaving the power with the Board but ensuring that no one appointed to the Board has the expertise to add much value at all.

This is the Board, you may recall, that Grant Robertson tried to tell us last week had no responsibility for monetary policy.

The legislation is a mess, and I hope that if there is a change of government next year that the new government makes some legislative time available to tidy up some of these provisions, and completing a transition to a model in which a proper MPC has the core responsibility, collectively and individually.

As for the substance of the consultation, I have made a short submission, the text of which is here

Comments on first-round MPC Remit review

Some of my points are already dealt with above, and several are fairly minor in nature. I am broadly happy with the basic shape of the Remit, and it would ot be the end of the world were it simply to be rolled over as is.

I continue to favour a reduction in the inflation target, returning to the 0-2 per cent formulation we had in the 1990s, which is much closer to “a stable general level of prices” (the statutory formulation – and note that the Act is not up for grabs in this review). To make that feasible the effective lower bound on the nominal OCR (perhaps around -0.75 basis points) has to be addressed and either removed or substantially eased (doing so is not a difficult technical matter, but no central bank has yet done so). But even if the target is kept at a range of 1-3 per cent with a focus on the midpoint of 2 per cent it is important that the lower bound issues are addressed. We are in some respects fortunate that the 2020 downturn proved not to be primarily an adverse demand shock, but demand-led recessions will be back, and central banks are not adequately prepared for them. Meanwhile, the consultative document treats the lower bound issues as a given, even though as a technical matter they are entirely under the control of “the Bank” (how well equipped do you suppose that Board is to deal with these conceptual, legal, and monetary economics issues?)

Here are the last few paragraphs of my short submission

9 thoughts on “Consulting on the Remit

  1. Michael, I suspect the child who observed that the emperor was wearing no clothes, was subsequently invited to be a royal courtier. NZ is a very small pond where uncomfortable views are not welcomed.


  2. Pivot Michael Pivot.
    The RBNZ is the keystone cops of banking in NZ. It is a creature of government , controlled by government ,drinks the government kool aid and in the word of the Guv’nor it’s doing things “the maori way”. Lower your expectations and you’ll be less frustrated at the antics of this Potemkin village.


  3. The current Minister of Finance and Governor are asymptotic political bedfellows: The Governor is quite happy to use the Central Bank to promote his own agenda(s), while the Minister of Finance will be purring with contentment, as he watches the RBNZ debase & immolate itself, being an institution he no doubt is ideologically opposed to – the Shirov’s bishop sacrifice twixt politicians & bureaucrats if you will.

    National knowing that elections are usually lost, not won, are quite happy to say nothing and wait it out, hoping to pick up the pieces in 2023 should the polls prove right…unfortunately they seem to have forgotten the tale of Humpty Dumpty.


  4. Thank you again Mr Reddell for the courage to expose what is happening in our most important financial market.
    National is certainly failing to put their stamp on any solution to this crisis.
    The Reserve Bank is apparently in crisis with horrendous losses and no effective solutions.The NZD is in decline
    The “ independence “ of the bank seems now consigned to history.Their attention to restrain 7% inflation has been cursory.They appear not to care that while inflation is approx 7% attempting to control with an OCR around half that and the present Government keep’s spending and spending.
    This is very dangerous failure!

    OK ,National what would you do different?


  5. I’m not sure what the ideal structure of the board/MPC/The Bank should be, and who should report to who. But surely you shouldn’t have the same body setting (even indirectly) a target and then responsible for meeting it? If the MPC has to advise the minister on what the target should be and then has to meet the target, wouldn’t that give them the leeway to suggest a target just to make their own jobs easier?

    I completely agree the lower bound issues should be fixed and the range moved to 0-2% (or 0-1%).


    • I don’t have a problem with the MPC providing input on the target design, so long as the minister has the last word and is also getting robust advice from Treasury, who are now formally responsible for monitoring the RB.


  6. You are right to highlight that changing the RBNZ’s target did not lead to New Zealand’s current inflation predicament. However, you are incorrect to intimate this is just due to forecasting errors. Absent international factors, New Zealand is where it is on the inflation front because (as the saying goes it “is always and everywhere a monetary phenomenon”) of the lack of capability, judgement and professionalism displayed by the RBNZ in dealing with monetary policy.

    Capability, in their lack of technical competency in undertaking robust analysis to understand the factors and drivers, if maybe not the magnitude, of inflation. Judgement, in terms of knowing when, where and how (or not) to apply their monetary policy tool kit in response to prevailing conditions, especially given the
    uncertainty and risks surrounding the global macroeconomic/geopolitical outlook . Professionalism, in their lack of ability to recognise, accept and then pivot from a poor call – instead reverting to base propaganda (‘first to raise’) in order to obfuscate their errors.


    • Don’t disagree with much of that but if I was mounting the case for the defence I’d point out that whatever contributed to the RB forecasting mistakes, and then policy mis-steps, their view of things for much of last year wasn’t much difffernt from where most other forecasters/commentators were.

      I suppose I am wary of drawing too tight a link between the policy failures and the flaws and inadequacies of the key people/processes. By most counts (eg) the RBA and BoE have better people, deeper benches etc, and yet have ended up with similar policy mistakes.


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