The Rennie report finally sees the light

Almost a year ago now, the former Minister of Finance Steven Joyce asked The Treasury to commission some advice on possible changes to the governance of the Reserve Bank.  We only found this out a couple of months later, and then only when hints of a review seeped out prompting a journalist to put the direct question to the then Minister.  It turned out that Iain Rennie, former State Services Commissioner (and before that former senior Treasury official) had been commissioned to write the report –  indeed, by the time we learned of the commission, Rennie had already largely completed his work.

All along the way, The Treasury has been incredibly obstructive about the review.   The terms of reference have never been released.    They eventually told us (some of) the people Rennie had talked to, and the names of the peer reviewers Treasury had used but refused to release drafts of the reports, comments made by reviewers, or the finished report itself.   They even took to arguing that it had all been Treasury’s idea, and that the report was just to inform Treasury’s own post-election advice, as if Steven Joyce had never been any part of the story.    Frankly, it was a pretty gross case of flouting the Official Information Act –  for what was, when all boiled down, a private consultant’s report, paid for with public money, on matters of organisational design and goverance of a single government agency.

But yesterday The Treasury finally (and quietly) released the report itself, along with comments from the peer reviewers (on an earlier version, itself still secret), some advice on the report from Treasury to the (new) Minister of Finance, and some recent comments from the Reserve Bank on the contents of the Rennie report (all available here).   I appreciate the pro-activity of The Treasury in at least letting me know that the report was now, belatedly, available.    The material is all now presented as background material for the current two-stage review of the Reserve Bank Act, including the contribution of the Independent Expert Advisory Panel.

The Rennie report itself is here.  It isn’t a bad report –  in fact, for a fairly short report done quite quickly, it is a bit better than I had come to expect.   In some respects, the details don’t matter that much –  it is just one person’s view (having consulted not very widely, and mostly with people inside the central bank “club”), and his report has been superseded by the wider review Grant Robertson has commissioned.  Rennie’s report will be just one input to that mix.

Then again, Rennie had been the State Services Commissioner.  And he’d been the Treasury Deputy Secretary responsible for things to do with macro policy and the Reserve Bank (at the time of the last major review, with Lars Svensson, at which time Treasury had opposed any change in the governance and decisionmaking model).

And Rennie is quite clear that:

  • the current single decisionmaker model is far from best practice, whether considered relative to other central banks/ financial regulatory agencies, or relative to the governance of other New Zealand public sector entities,
  • a single committee is not a sensible solution.  Rennie, in fact, ends up favouring three separate committees (a model very similar to the one used now in the United Kingdom –  one for monetary policy, one for (so-called) micro-prudential policy, and one for (so-called) macro-prudential policy),
  • an internal executive committee (or even several of them) is not an appropriate solution.  External, non-executive, members should be involved,
  • the Minister of Finance should have primary responsibility for the appointment of all the members of the decisionmaking committees, given that the committees exercise significant statutory powers.

And on monetary policy he favours a materially greater degree of transparency than exists at present, including favouring (on-balance) the individualistic model –  as, for example, in the US, the UK and Sweden –  where individual members are individually accountable for their advice and their votes.    Existing Reserve Bank management hates –  I don’t think that is too strong a word –  that model: they hated it when I was still at the Bank, and in recent months they have gone public with their intense dislike of it.

There are lots of other details in the report, some of which I strongly agree with (eg the Policy Targets Agreement shouldn’t be tied to the appointment of the Governor, and if the Board is to be retained as a monitoring agency, it needs some resources of its own, and the Governor himself should not be a member), and others of which I’m more sceptical of (eg the proposed role of the State Services Commission in advice on the selection of the Governor and Deputy Governors, or the idea of devising a –  meaningful –  formal charter for the prudential committees).   One of the peer reviewers –  my former colleague David Archer –  is keen on a greater formal role for Parliament in the appointments, something I’m sceptical of (it just isn’t our constitutional system).  But I would probably favour emulating one aspect of the UK system Rennie doesn’t really touch on: hearings by Parliament’s Finance and Expenditure Committee in which nominees to the various committees can be scrutinised by MPs (and reported on), although not a binding confirmation vote (as in the US).

There are also limitations to the Rennie report.   For example, he treats the current assignment of powers to the Reserve Bank as given (perhaps this was inevitable in what he was asked for, but isn’t a limitation of the current review), a particular issue in the area of financial regulation and supervision.   There also isn’t much richness to his treatment of other countries’ models –  and it remains surprising that he made no effort to engage with Lars Svensson, who was not only a former reviewer of the New Zealand system, but a former practitioner (member of the Swedish monetary policy committee) in the sort of system (open contest of ideas) Reserve Bank management hates.  And perhaps partly because Rennie seems only to have talked to insiders –  eg there was three pages of (totally withheld) material in the Reserve Bank Board minutes on his meeting with them, and no attempt at open consultation –  there is no serious attempt to evaluate how effectively (or otherwise) the Board model has worked over the years.

What of the Treasury’s comments on Rennie?  Their report is short and is mostly a summary of Rennie’s recommendation.  But it was good to see this observation

“we are strongly of the view that a committee decision-making model should be codified in the Reserve Bank Act, and agree that there should be multiple committtees which include external experts”

In the first stage of the current review the government has only committed to a committee, with externals, for monetary policy.  I hope Treasury sticks to its guns, and persuades the Minister of Finance that better governance and decisionmaking on the financial regulation side of things is at least as important, and needs it own statutory reforms.    As even Rennie noted, there is –  for example –  a stark contrast between the governance of the other main financial regulatory –  the FMA –  and that of the Reserve Bank.  In the former, a non-executive Board (all appointed directly by the Minister) has overall responsibility for the organisation and the exercise of its powers, with some specific powers being delegated the Board to the chief executive and staff.  That is a much more conventional, and defensible, model than the Reserve Bank model in which all the power is held by the Governor personally.    And the Reserve Bank exercises a much greater degree of discretion over policy itself –  especially as regards banks –  than the FMA does (where big picture policy is mostly set by the Minister on the advice of MBIE).

As I noted, in yesterday’s release there was also a short note by the Reserve Bank commenting on the Rennie report.  Even though the report was completed months ago, this note is dated 11 December, and is prepared for the Independent Expert Advisory Panel assisting the Treasury-led phase one of the current review of the Reserve Bank Act.  Presumably there are rather more substantive comments, which the Bank is keeping secret –  along with all the extensive background work  (Rennie mentions it) done a few years ago on these issues, which the Bank has previously refused to disclose.

The Reserve Bank does not like the Rennie report at all.

we believe that much of the analysis underpinning the report was insufficient, and consequently the conclusions of the report are unreliable, or would require considerable further analysis.

“Sniffily dismissive” was my own summary of the Reserve Bank’s reaction.

In hand-waving mode, the Bank loftily notes

The Report does not define the nature of the problem it is seeking to address and needs a clearer analysis of the current decision-making framework and why it needs amending. In proposing a particular set of changes to the decision-making framework, the Report fails to provide options and does not demonstrate why the particular changes proposed would result in better policy decisions for monetary or financial policy in New Zealand.

You might suppose that having a decisionmaking and governance model designed thirty years ago when

(a) few central banks had updated their laws in these areas for a long time,

(b) our own laws and practices for governing Crown entities had not really been updated,

(c) the prevailing conception in New Zealand was that monetary policy was simple, and that it would be easy to hold a single decisionmaker to account,

(d) when financial regulation was conceived as a small and largely passive part of what the Reserve Bank did and

(e) when open government was still a pretty new concept, largely unknown to central banks and related regulatory agencies

was sufficient grounds for a serious review, and the probability that better models could be designed.   One might be strengthened in that view if one was aware that (as Rennie notes) no central bank has shifted from a committee-based decisionmaking to a single decisionmaker model for monetary policy, or was aware that no other significant regulatory body in New Zealand was governed the way the Reserve Bank is.

Had a five person Commission spent a year on the report, no doubt there would have been a lot more richness to the background material.  But the case for change has come to be pretty widely accepted already, and even the Reserve Bank gives the game away by conceding that committee-based decisionmaking is generally better than that of a single individual.  Once they conceded that –  and they could hardly do otherwise –  much of the rest of the issue is about detail.

But it doesn’t stop the Bank attempting to distract the Independent Expert Panel.

The Report makes no attempt to document the processes that the Bank actually uses to support its decision-making, beyond the high level parameters established by the Act. Nor does The Report attempt to evaluate the mechanisms that the Bank currently has in place to help ensure that its decision-makers confront a broad range of policy perspectives, including a wide range of views of those outside the Bank. There is, for example, no mention of the role of the broader group of MPC members in providing policy advice to the Governing Committee, the use of external advisers on the MPC, the Bank’s programme of business and financial sector liaison, its active public outreach programme, or its participation in the international financial and economic community. These are all ways in which the Bank considers a diversity of external views and perspectives ahead of its monetary policy decisions.

But so what?   All central banks do this sort of stuff in one form or another, and yet almost all of them also have the respective country’s Parliament specify a statutory committee as the basis for monetary policy decisions.  And if it is good enough for the Governor to invite a couple of outsiders into his second-ring of advisers (these days: it was the first tier when the system was established) why shouldn’t Parliament mandate the involvement of external members?   Moreover, the case for reform has rarely been about the problems with an individual Governor, but about a core principle of institutional design –  resilience.  We don’t want a system that works adequately only when a decent Governor is in place, but when that is resilient to bad choices and bad individual appointees (because in human systems there will be some of those).

I don’t disagree with all the Bank’s comments.  They oppose establishing two separate statutory committees for the different aspects of prudential policy, and I agree with them on that (apart from anything else, the whole thrust of bank supervision –  in particular-  is systemic in nature).

Rennie’s report recommended leaving the precise composition of statutory committees as a matter for negotiation through time.  I think that is wrong.  That balance is sufficiently important that it should be specificed in legislation (as, I understand it, is the near-universal practice abroad).   The Reserve Bank is clearly opposed to any suggestion that external members should out-number internal or executive members.

There is a strong argument that external members should not be able to out-vote the internal members if the latter are in agreement. Such an occurrence could severely undermine the influence of the Governors and the credibility of the institution.

I disagree, and was pleased to see that external reviewer Archer took the same view.  He argued  –  noting that the “probability of groupthink increases with the presence of hierarchy”  –  that “the law should restrict the proportion of executive insiders to below half by a big enough margin that these tendencies have a chance to be offset.

On the Reserve Bank’s argument:

  • if the Reserve Bank insiders, with all the resources and professional expertise at their disposal, can’t persuade enough outsiders to their point of view, it suggests they haven’t got a particularly compelling case (and may in turn struggle to convince outsiders),
  • if the system is set up with, say a 4:3 mix of outsiders and internals, it is explicitly designed by Parliament not to make the Governor a dominant figure (let alone any deputies).  The Governor and Deputy Governors have important executive roles in the management of the institution (generating advice and research, implementing decisions etc) and there should be no automatic presumption that the holders of those offices should play the key role in deciding the OCR outcome,
  • other countries have managed situations in which the Governor has been outvoted, without undermining the institution, and finally
  • even if there were such concerns, the Governor (and other executive staff) always have the option of voting tactically, such that there is no a straight insider/outsider split.  In a number of overseas models, the Governor chooses to vote last.

Perhaps anecdotes aren’t worth much, but it is worth recalling that the senior managers of the Wheeler bank were unanimous in their support of the 2014 tightening cycle.  And wrong.   Groupthink among internals is one of the problems reforms should be trying to overcome.

The Reserve Bank is also pushing back against Rennie’s proposal that all members of the decisionmaking committees (all three of them in his case) should be appointed by the Minister of Finance.

As in any other senior management context, it is essential that the Governor has confidence in his or her senior staff. There are few examples where a Chief Executive has no input into the selection of the senior management team.   It is also surprising that the Report does not confront the dangers that could arise in a system where appointments to the Policy Committees were made by the Minister of Finance. While the Report’s recommendation appears to be made largely on the grounds of ensuring decision-makers have democratic legitimacy (as per the discussion in para 102), the potential risks of political appointments are not considered.

The first of those arguments might look superficially plausible, at least in a corporate context.  But this is a situation where people are exercising considerable statutory powers.  And in central banks it is not at all uncommon for senior figures (often “deputy governors”) to be appointed directly  by Ministers with no formal role for the Governor in that decision (in practice, no doubt there is often consultation).   That is the way things work at the Reserve Bank of Australia (although the Governor then gets to appoint all the actual department heads, which seems appropriate), and at the Bank of England (for deputy governors), and at the Federal Reserve, and at the ECB.  It is pretty much the norm in fact.     Things are different in more conventional models like the Financial Markets Authority, where power vests with the Board, not with management (even the CEO, let alone his/her deputies).

As for the second argument, yes of course there are risks with political appointments.  There are risks with democracy in fact.  But if the Reserve Bank criticises Rennie for not covering that issue in great depth –  he touches on it, and to some extent takes it for granted –  the Bank itself never acknowledges that direct political appointment is the norm in other countries, and seems to work.  Certainly, they cite no evidence suggesting that the New Zealand system has produced superior results to those abroad.  As it happens, Rennie does touch on and speaks favourably of consultation by the government with other political parties for some of these appointments (as is apparently required  by the NZ Superannuation Fund board).

The final Reserve Bank concern that I want to touch on today is the one that seems to concern them a lot: the idea (endorsed by Rennie) that individual members of the statutory Monetary Policy Committee should be individually accountable for their views: that votes, and views, should be minuted and disclosed, and that individual members should be able to openly voice their views (in, eg, speeches or interviews).     It is pretty much exactly the model that has been used in the UK, the USA, and Sweden for quite a long time now.

But here is the Bank.

The proposition that members of the monetary policy committee would be able (and expected) to highlight their individual policy views in public is problematic. While this approach is clearly adopted in some countries (notably the UK, US), we believe such an approach could be destabilising in a small open economy like New Zealand. Any perception of a rift between committee members would be likely to add unhelpful noise to the communication of policy as well as inviting outside lobbying around particular views. There are more constructive ways of conveying divergent viewpoints and the balance of risks around monetary policy decisions.

Neither here nor previously has the Bank –  Spencer, Bascand, McDermott, the existing senior management –  ever sought to clearly articulate what it is about the model used in other countries that would not work well here.   I gather they aren’t even able to do so effectively in private and they floundered in an earlier press conference when they tackled the topic.

What makes New Zealand so different from, say, Sweden –  another “small open economy” –  or in these respects different from the US or the UK (UK economists often like to claim it too is a small open economy)?    The Bank makes no effort to tell us.    They never grapple with notions of open government –  as Rennie notes, the principles of the Official Information Act bias towards openness –  but perhaps as importantly they never really grapple with the huge uncertainties that face monetary policymakers everywhere and always.  Differences of view among policymakers shouldn’t be seen as problematic –  and they don’t seem to create great problems in other countries –  but as, if anything, reassuring.  Groupthink is one of the perils of any institution, and it is perhaps particularly risky where so little of the relevant future is known with any confidence.

Here is David Archer –  former chief economist of the Bank, and now head of central bank studies at the BIS.

Apparent unanimity is quickly shown to be untrustworthy spin. The essential reason is that the future is largely unknowable, and it is foolish to pretend otherwise. Consider the records of the few central banks – including the RBNZ – that publish forward policy interest rate paths. Forecast paths are almost always poor predictors of reality, even in the RBNZ case where unanimity about the outlook exists by construction. Being honest about the limited predictive powers of even highly paid specialists is likely eventually to increase their trustworthiness, at least relative to the results of repeated false marketing
of ostensible consensus.

I’d agree with every word of that.  He argues for timely release of good and transparent minutes, which reflect the individual differences of view.

I don’t like to think that the existing management of the Bank are just trying to protect their own position –  although bureaucrats will tend to protect themselves and their bureau, often to the detriment of the public –  but without a more robust articulation of their specific concerns, grounded in the international experience, it is hard to conclude otherwise.    Policymaking is typically better for dialogue, debate, and challenge –  inside the institution, outside in, and across the boundaries between the two.    Where there is so much uncertainty, and no institutional monopolies on wisdom or knowledge, it is perhaps as important in these functions as in any other areas of government.  It might not be comfortable for the bureaucrats, but that isn’t the goal of policy or institutional design.  And excellent officials –  as excellent outsiders –  should thrive on the opportunities that open and transparent contest of ideas and analysis throws up.

For now, I urge Treasury and the Independent Expert Advisory Panel –  not a group of individuals I have huge confidence in –  to reject the Bank’s apparently self-serving arguments, and to make recommendations that would lead to the redevelopment of a leading open, transparent and accountable central bank.

The Robertson reviews of the RB Act

When you’ve favoured a reform for the best part of 20 years, and made the case for it –  inside the bureaucracy and out –  for several years, then, even though it was a reform whose time was coming eventually, there is something deeply satisfying about hearing the Minister of Finance confirm that legislative change will happen.    That was my situation yesterday when Grant Robertson released the terms of reference for the review of the Reserve Bank Act, including specific steps that will before long end the single decisionmaker approach to managing monetary policy.   Various Opposition parties had called for change (the Greens for the longest), market economists had favoured change,  The Treasury had tried to interest the previous government in change five or six years ago, before Graeme Wheeler was appointed.  But now the Minister of Finance has confirmed the government’s intention to introduce legislation next year.   The amended legislation won’t be in place before the new Governor takes office, but presumably the policy will be clear enough by then that the new Governor will know what to expect, and what is expected of him or her.  Reform was overdue, but at least it now looks as though it will happen.

There were several aspects to yesterday’s announcement from the Minister of Finance:

  • the new “Policy Targets Agreement”,
  • the two stage process for an overhaul of the Reserve Bank Act, and
  • inaction on the appointment of the new Governor.

In what looks like not much more than a photo opportunity, Grant Robertson got Grant Spencer, current “acting Governor” of the Reserve Bank over to his office and together they signed a “Policy Targets Agreement” that was, in substance, identical to the one Steven Joyce and Grant Spencer had signed in June.

There was no legal need for a new Policy Targets Agreement (even if either of these two documents had legal force, which they don’t), and no incoming Minister of Finance has ever before requested a new PTA (the Minister has to ask, and can’t insist) that is exactly the same as the unexpired one that was already in place.   When National came to power in 2008, they did ask for a new PTA.   The core of the document –  the obligations on the Governor –  weren’t altered, but they did replace clause 1(b), which describes the government’s economic policy and how the pursuit of price stability fits in.  Under Labour that had read

The objective of the Government’s economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives.

National replaced that with

The Government’s economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders. Price stability plays an important part in supporting this objective.

If the new Minister of Finance really thought a new PTA was required to mark his accession to office, surely he could have at least replaced the National government’s policy description with one of his own –  even simply going back to Michael Cullen’s formulation, which actually mentioned full employment.

Apart from the photo op, I’m not sure what yesterday’s re-signing was supposed to achieve.  The Minister presented it as providing certainty to markets, but it does nothing of the sort: we are in the same position now we were a couple of days ago, Robertson had already told us he wouldn’t make substantive changes until the new Governor was appointed and we still have no idea who that person will be, or what the precise mandate for monetary policy only a few months hence will look like.  Nor, presumably, does the Reserve Bank.

And by signing the document, Robertson seems to have bought into Steven Joyce’s “pretty legal” (but almost certainly nothing of the sort) approach to the appointment of an “acting Governor”.    As I’ve noted previously, the Reserve Bank Act does not provide for an acting Governor except when a Governor’s term is unexpectedly interrupted (death, dismissal, resignation or whatever), and –  consistent with this –  there is no provision in the Act for a new Policy Targets Agreement with an acting Governor (since a lawful acting Governor will only be holding the fort during the uncompleted term of a permanent Governor who would already have had a proper and binding PTA in place).    Spencer’s appointment appears to have been unlawful, and Robertson has now made himself complicit in this fast and loose approach to the law.   Consistent with the fast and loose approach, he allowed Spencer to sign yesterday’s Policy Targets Agreement as “Governor”, not as “acting Governor”.  He cannot be Governor, since under the Act any Governor has –  for good reasons around operational independence – to have been appointed for an initial term of five years.  And he isn’t acting Governor, since there is no lawful provision for him to be so in these circumstances.  At best, he is “acting Governor” –  someone purporting to hold that title.

The heart of yesterday’s announcement, however, was the two stage process for reviewing and amending the Reserve Bank Act.

Phase 1:

The review will:
• recommend changes to the Act to provide for requiring monetary policy decision-makers to give due consideration to maximising employment alongside the price stability framework; and

• recommend changes to the Act to provide for a decision-making model for monetary policy decisions, in particular the introduction of a committee approach, including the participation of external experts.

• consider whether changes are required to the role of the Reserve Bank Board as a consequence of the changes to the decision making model.

A Bill to progress the policy elements of the review, including on the details necessary to introduce a potential committee for monetary policy decisions, will be introduced as soon as possible in 2018. This will give greater certainty on the direction of reform in advance of the appointment of the next Reserve Bank Governor, currently scheduled in March 2018.

Phase 1 of the review will be led by the Treasury, on behalf of the Minister of Finance. The Treasury will work closely with the Reserve Bank who will provide expert and technical advice. An Independent Expert Advisory Panel will be appointed by the Minister of Finance to provide input and support to both phases of the Review.

Phase 2:
In line with the Government’s coalition agreement to review and reform the Reserve Bank Act, the Reserve Bank and the Treasury will jointly produce a list of areas where further investigations of the Reserve Bank’s activities are desirable. This list will be produced in consultation with the Independent Expert Advisory Panel.

This list, and the next steps for the review, will be communicated early in 2018. This phase of the review will incorporate the review of the macro-prudential framework that was already scheduled for 2018.

It is clearly intended as a pragmatic approach.  With a new Governor to take office in March, they want to get on with the specific changes Labour campaigned on  so that they come into effect as soon as possible after the new Governor is in office (realistically, it is still hard to envisage the new Monetary Policy Commitee making OCR decisions and publishing Monetary Policy Statements until very late next year –  perhaps the November 2018 MPS – at the earliest.)  It also appears to aim to separate the things on which the government mostly just wants advice on how best to implement changes they’ve promised, from other issues that may need looking at but where the parties in government have not taken a strong position.

But it still leaves me a little uneasy, on a couple of counts.

First, while it would be easy enough, after due consideration, to make limited changes to the Act to give effect to the desire to make explicit a focus on employment/low unemployment without many spillovers into the rest of the Act (I listed here a handful of clauses I think they could amend to do that),  I’m less sure that is true of the monetary policy decisionmaking provisions.    As the terms of reference note, if monetary policy decisions are, in future, to be made by a statutory committee, it raises questions about the role of the Bank’s Board –  whose whole role at present is built around the single decisionmaker (the Governor has personal responsibility for all Bank decisions not just monetary policy ones).

But how can you sensibly make decisions about the future role of the Board without knowing what changes (if any) you might want to make to the Bank’s other functions?  If, in the end, you leave all the other powers in the hands of the Governor personally, something like the current Board structure might still make sense, with some minor changes as regard monetary policy decisions.  But if you concluded that a statutory committee was also appropriate for financial stability issues, and that even the corporate functions should be governed in more conventional ways (Board decides, chief executive implements), there might be no place at all for a Board of the sort (ex post monitoring and review agency) we have now.    Decisions about the governance of an institution need to start by taking account of all the responsibilities of the institution, not just one prominent set of powers.

Second, it may be difficult to maintain momentum for more comprehensive reform once the government’s own immediate priorities have been dealt with.    On paper, it doesn’t look like a problem, but resources are scarce, legislating takes time and energy, implementing new arrangements for monetary policy takes time and energy, and it would be easy for momentum on the second stage to lapse (whether at the bureaucratic level, or getting space on the government’s legislative agenda).    That risk is compounded by an important distinction between phases one and two.    In phase one, the Treasury is clearly taking the lead, on behalf the Minister.  In phase two, we are told, “the Reserve Bank and the Treasury”  (the order is theirs) will “jointly” produce a “list of areas where further investigations of the Reserve Bank’s activities are desirable”.    A joint list raises the possibility of the Bank holding a blocking veto –  not formally, but in practice –  and where the Bank is more interested in (a) blocking other far-reaching changes that might constrain management’s freedoms, and (b) advancing whatever list of minor reforms it might have in mind itself.

Perhaps in the end much will depend on the Minister himself, and on the Independent Expert Advisory Panel he plans to appoint.  But the Minister of Finance will be a very busy man, and up to now he has shown little interest in reforms of the Reserve Bank legislation beyond the first stage ones.

What of the panel?  We’ll know more when we see what sort of people are appointed to it, and how much time they are being asked to give to the issue.

In a set of Q&As released with yesterday’s announcement the Minister indicated of the panel that “they will be individuals with independence and stature in the field of monetary policy, including governance roles”.   That is probably fine for phase one (which is monetary policy focused), but the bulk of the Bank’s legislation, and much of its responsibility, has nothing to do with monetary policy at all.  So if the panel is going to play a substantive role in the planned phase 2, I’d urge the Minister to consider casting his net a bit wider.

As to who might serve on it, there aren’t that many with what look like the right mix of skill, experience, and independence.  It is sobering to reflect that when the (still secret) Rennie review on related issues was done earlier in the year, not a single domestic expert was consulted.  I imagine they will want to draw mainly on people who actually live here.  But if possible, I would urge Treasury and the Minister to consider inviting Lars Svensson to be part of the panel –  as someone who has undertaken a previous review for an earlier Labour government, someone who supports an explicit employment focus, and someone with practical experience as a monetary policy decisionmaker.    David Archer – a New Zealander (and former RB senior manager) who now heads the BIS central banking studies department – might also be worth drawing on.

The third dimension of yesterday’s announcement was the Minister of Finance’s comments about the process for appointing a new Governor.    There I think he is making a mistake.

In his Q&As, the Minister noted that “the process for appointing a new Governor is in the hands of the Board”.

Newsroom reports that, when asked, Robertson noted that

“I’ve met with the chair of the board and he has assured me that process is underway and well under way and going well. I sought an assurance from him that any candidates he was interviewing would be ones who would be able to implement a change to policy along the lines we’re going, he expressed his confidence about that but in the end the process itself lies in his hands.”

Appointing a new Governor of the Reserve Bank is –  or should be –  the most consequential appointment Robertson will make in the next three years.  For a time that person will, single-handedly, wield short-term macro-stabilisation policy (which is what monetary policy is) and –  perhaps indefinitely –  will wield all the regulatory powers of the Bank.  Even if committees end up being established for both main functions, the Governor will have –  and probably should have –  a big influence on how, and how well, macro and financial regulatory policy is conducted over the next five years.

There has been a pretty widespread sense that the Reserve Bank in recent years has not been operating at the sort of level of performance –  on various dimensions –  citizens and other stakeholders should expect.  That isn’t just about substantive decisions, but about supporting analysis, communications, operating style etc.  And yet the Reserve Bank Board –  and chairman Quigley –  have backed the past Governor all the way (whether on minor but egregious issues like the attempts to silence Stephen Toplis, or on the conduct of monetary and regulatory policy).   But the new government claims to want something different.   The issue isn’t whether a potential candidate can, as a technical matter, manage the sort of phase 1 changes the Minister plans.  I’m sure any competent manager could.  The more important issues are around alignment and vision.  Is the Minister content to leave the process to the Board –  all appointed by the previous government – and take a chance on them coming up with someone who represents more than just the status quo?   At this point, it appears so.  Apparently, the selection process will not be reopened, even though the advertising closed months ago and the role of the Bank (and Governor) is to be changed.

It is quite an (ongoing) abdication by the new Minister. In (almost all) other countries, the Governor of the Reserve Bank is appointed directly by political leaders (Minister of Finance, head of government or whoever).   Those leaders no doubt take soundings in various quarters, but the power –  and the responsibility –  rests with the politician.   Here, Grant Robertson just rolls the dice –  relying on a bunch of private sector directors appointed by his predecessors –  without (it seems, from the tone of his comment above) a high degree of confidence in the outcome.  Perhaps he’ll like who the Board comes up with. But if he doesn’t, so much time will have passed that he’ll be stuck. He can reject a Board nomination, but they’ll just come back with the next person on their own list, evaluated according to their own sense of priorities etc.  It isn’t the way appointments to very powerful positions –  the most powerful unelected person in the country for the time being –  should be done.

And two, very brief, final points:

  • now that the government has changed, and the Minister who asked for the Rennie review of Reserve Bank governance issues has gone, surely there can be no good grounds for continuing to withhold Rennie’s report and associated papers?  It is not as if it is playing any role in the current Minister’s thinking.

    Newsroom also asked Robertson if he had seen a review of the bank undertaken by former State Services Commissioner Iain Rennie that was requested by former Finance Minister Steven Joyce.   He said he was yet to see it, but had asked Treasury about it.

  • we are told to expect a new Policy Targets Agreement when the new Governor is appointed.   Presumably, true to past practice, the first the public will know about it is when the document –  guide to macro-management for the next five years –  is released.    It would good if the Minister of Finance would commit now to proper transparency, including pro-active release (once the document is signed) of  relevant documents.  It would be better still if he would think about adopting the considerably more open, and rigorous, Canadian model.

    Less than a year since completing the last review of its inflation-targeting mandate, the Bank of Canada is starting to prepare for the next one in 2021.

    Consultations kick off in Ottawa on Sept. 14 with an invitation-only workshop of economists that will be webcast on the central bank’s website. It’s an early public start to the process, and comes amid a growing sense that a deeper look at the inflation target is needed after almost a decade of poor economic performance.

A more open approach to these issues – as practised in Canada for years – has much to commend it (even if I didn’t always think so when I was a bureaucrat.)

OIA: unexpected bouquets and brickbats

I have been critical over the years of the Reserve Bank’s approach to Official Information Act requests.  I made mention of it, in passing, just this morning.   The long-established practice had been to withhold absolutely anything they could conceivably get away with, and to delay as long as possible anything they really had to release.   The presumptions of the Act (well, specific provisions actually), of course, operate in the opposite direction.

In the last couple of weeks I had lodged requests for a couple of pieces I had written while I was still working at the Bank in 2014.   One was the text of a speech, on New Zealand economic history and the evolution of economic policy, to a group of Chinese Communist Party up-and-coming officials, delivered as part an Australia New Zealand School of Government programme (in which they got to hear from John Key, Gerry Brownlee, Iain Rennie, no doubt a few others, and me).     The other was a discussion note I had written on how best to think of New Zealand’s economic exposure to China.    The second request was lodged only late on Monday.    I could not envisage any good (lawful) reason for them to withhold the material, but that often hasn’t stopped the Reserve Bank in the past.  If they released the material at all, I was anticipating a 20 working day wait.

But this afternoon, I received both documents in full.  I was shocked.  I took the opportunity to send a note to the Bank thanking them for the prompt response.  And as I have often been critical here of aspects of the Bank’s handling of various things, including OIA requests, I thought I should take the opportunity to record my appreciation openly.    Who knows what prompted the change, but it is an encouraging sign.  Perhaps the “acting Governor” (a sound caretaker, unlawful as his appointment may be) is making a positive difference?

On the other hand, I’ve usually been pretty openly positive about The Treasury’s approach to OIA requests.  One isn’t always happy with their decisions, but there is a strong sense that they generally do all they can to be as open as possible.    There is the look and feel of an agency that seeks to comply with the spirit of the Act, as well as the letter.

But not when it comes to the Rennie review.   Some time ago, they refused a journalist’s request for the terms of reference for the review.   They also refused to release some of the papers associated with the Rennie review (including drafts of the report) that I had requested some time ago .   In July they told me they wouldn’t release papers because of “advice still under consideration” (even though that is not a statutory ground, and Rennie is neither a minister nor an official, and even though I had not then requested a copy of the final report which had been delivered in April).

But time has moved on, and so early last week I lodged a fresh request.  This time I asked for:

I am requesting copies of :

  • the draft supplied to Treasury on 5 April 2017
  • the report delivered to Treasury on 18 April 2017
  • the version of the report sent out for peer review
  • the completed report incorporating any comments provided by the peer reviewers.
  • copies of comments supplied on the draft paper by peer reviewers
  • file notes of meetings Rennie or assisting Treasury staff had with non-Treasury people in the course of undertaking the review (including the Board of the Reserve Bank).

I am also requesting copies of any advice to the Minister of Finance or his office on the Rennie review, and matters covered in it, since 18 April 2017.

And this afternoon I got a response from The Treasury, refusing to release any of this material.

Their justification?

This is necessary to maintain the current constitutional conventions protecting the confidentiality of advice tendered by Ministers and officials.

That is, in principle, a valid statutory ground (unless public interest considerations trump it).  But…..Iain Rennie is not an official or a Minister, but was rather a contractor to The Treasury.

But what about the advice to the Minister himself (or his office)?  Well, according to Treasury,  “Mr Rennie’s report has not been tendered to the Minister of Finance, nor has any other Treasury advice on this issue since the report was commissioned.”

So, the report which was requested by the Minister of Finance himself (he told a journalist so in April which is how news of the review became public), which was finalised more than six months ago, has not been sent to the Minister of Finance at all, and nor has any advice from Treasury been sent.  Since oral briefings are covered by the Official Information Act, we must then assume that a notoriously hands-on minister has no idea what is in a report he requested, and which was finished six months ago.   Perhaps, but it seems unlikely.

Treasury tries to claim in its letter “that this work was commissioned to inform Treasury’s post-election advice”.  But that certainly wasn’t the impression the Minister of Finance was giving in April, when this was presented as his own initiative.   But even if that story is true, it still isn’t grounds for withholding a six months old consultant’s report paid for with public money.  It is official information, and releasing the report is not the same –  at all –  as releasing Treasury’s views on it.

There were three external reviewers of the draft report.  Comments were sought from:

  • Charles Goodhart, an academic and former Bank of England official and MPC member,
  • Don Kohn, former vice-chair of the Fed, and currently a member of the Bank of England’s Financial Policy Committee, and
  • David Archer, former Assistant Governor of the Reserve Bank and now a senior official at the Bank for International Settlements.

The comments of the first two are withheld on the standard ground “to maintain the current constitutional conventions protecting the confidentiality of advice tendered by Ministers and officials”, but neither Goodhart nor Kohn is either an official (of New Zealand or –  in Goodhart’s case of anywhere) or a Minister, and these are comments on a draft report I’m seeking, not something ever likely to get as far as the Minister of Finance.

Archer’s comments are withheld on different grounds:

  • “the making available of that information would be likely to prejudice the entrusting of information to the Government of New Zealand on the basis of confidence by the Government of any other country or any agency of such a Governoment or by an international organisation”

But there is no indication that Archer was commenting on behalf of an international organisation, but rather was offering personal views (rather than confidential “information”).   It isn’t, say, confidential information about the business of, say, the BIS.

  • “to protect information which is subject to an obligation of confidence where the making available of the information would likely prejudice the supply of similar information or information from the same source and it is in the public interest that such information should continue to be supplied”.

There is no evidence that (a) Archer’s comments, made presumably in a personal capacity, were subject to an “obligation of confidence”, or (b) that publishing his comments on a draft report would make him less likely to provide such comments (not clearly “information” in any case) on future Treasury consultants’ reports on Reserve Bank issues.      And nor is there any reason why this clause should apply any more to Archer’s comments than to those of Goodhart and Kohn –  for which it has not been invoked.

It is all (a) incredibly obstructive and (b) not remotely convincing.  I will be appealing The Treasury’s decision to the Ombudsman.  Perhaps some journalist might consider asking Steven Joyce if it is really true that he has no idea what is in the Rennie report that he asked for eight months ago, which was completed six months ago, and which is held by his own department.  Even if that is true, it is not good grounds under the Act for withholding a consultant’s report, let alone drafts of it.

So, well done Reserve Bank.  And it is a shame about The Treasury.






The Rennie review: still secret

Hamish Rutherford has a new story up at Stuff on the review of aspects of the governance of the Reserve Bank undertaken earlier this year by former State Services Commissioner (and former Treasury Deputy Secretary for macro matters) Iain Rennie.  The report was undertaken for Treasury, at the request of the Minister of Finance.  The final report was, we’ve been told, delivered in mid-April.

I’ve written about this a review a few times:

But still the review report has not been released, and nor is Treasury willing to release either earlier drafts of the report, or the comments made by reviewers.

Today’s article appears to be prompted by some observations from ANZ chief economist Cameron Bagrie,

Cameron Bagrie, chief economist for ANZ, said without the terms of reference he was “flying a bit blind”, but it was possible the review was headed towards recommending a model used across the Tasman, where powers are split between the Reserve Bank of Australia and the Australian Prudential Regulatory Authority (APRA).
“The consensus seems to be that the review is about monetary policy,” Bagrie said.
“I suspect it’s broader and maybe they are looking at whether we have an Australian model where they have the RBA for monetary policy, financial stability, markets, payments et al and APRA for the prudential/regulatory side.”

I’m quoted in Rutherford’s article.  As I’ve said previously, I’d be really surprised if Rennie was recommending a structural separation (along the lines of Australia).  There are all sorts of models internationally, but I haven’t heard anyone in New Zealand for some years seriously propose structural separation (I may at times have advocated such a split in the past), especially since the British government a few years brought the regulatory functions back under the same roof as monetary policy.   There are separate statutory committees for each main function, but they are all conducted out of the Bank of England.  If anything, the global trend in recent years has been to emphasise the important overlaps or crossovers between monetary policy and financial stability, if only in respect of the underlying information flows.

Although Bagrie noted that “the consensus seems to be that the review is about monetary policy”, it has surely been clear for some time that the review could not have been that narrow in scope?  After all, Steven Joyce told us in April that he asked the reviewer to look at whether the Reserve Bank should continue to be responsible for its own legislation –  an issue that is almost entirely about the Bank’s regulatory responsibilities.  And the terms of engagement document did note explicitly that

The Treasury is contracting Iain Rennie to provide a report assessing governance and decision-making at the Reserve Bank.

Nothing there suggesting monetary policy only.  And, in any case, no reviewer could really do a serious job looking only at monetary policy, given that it occurs within an institution, and both functional and (whole of) institutional governance would be likely to be affected by any decisions regarding monetary policy.  And Treasury has been known to be unhappy about the governance of the financial regulatory functions –  including the Bank’s responsibility for its own legislation –  and Rennie was contracted by The Treasury.

On which note, Rutherford includes this

Top officials within the Reserve Bank are said to believe Rennie’s report is something of a power grab by Treasury.

Michael Reddell, the former special advisor to the Reserve Bank, said even the details about the report already released , around which organisation was responsible for the central bank’s governing legislation, amounted to a power play.

Far be from me to agree with the Bank on this.  If I said there was a “power play” involved, it was simply to note that the Treasury has long been uncomfortable about governance, accountability and information flows around the financial regulation powers of the Reserve Bank.  I happen to agree with them   There is too much power vested in one individual, and in one agency.  Those powers should be trimmed, and stronger accountability established.  The Treasury should probably be made responsible as the primary advisers on the various pieces of legislation the Bank operates under.

In a post a couple of weeks ago, I referred to the Bagrie thesis, the Rennie review, and Reserve Bank reform prospects more generally, noting

On the National Party side, you’ll recall that the Minister of Finance had Treasury hire former State Services Commissioner (and former Treasury deputy secretary) Iain Rennie to provide some analysis and advice on possible changes to the governance of the Reserve Bank.  Having had drafts reviewed by various experts, the report was completed months ago, but hasn’t yet seen the light of day.  Treasury has been blocking the release of even drafts of the report, or comments on the draft by reviewers, and nothing is heard from the Minister of Finance.    Presumably Rennie didn’t conclude that everything was just fine and no changes were required.  Had he done so, there would have been no reason not to publish, and it might even have been a small piece of useful ammunition against the sorts of reforms opposition parties are campaigning on.

The interesting question is (a) how far has Rennie gone in his recommendations, and (b) whether a re-elected National government (perhaps reliant on New Zealand First –  long critical of the Reserve Bank) would implement them?   I heard the other day a hypothesis that the report isn’t being released because it calls for reform so radical that the Reserve Bank would be split in two (a monetary policy and macro agency, like the Reserve Bank of Australia, and a prudential regulatory agency (like APRA).   There are pros and cons to such a structural split, but I haven’t for a long time heard anyone here seriously propose it as an option (and particularly not since the UK government brought all those functions back under one roof).    Time will tell, but I would hope Rennie would recommend things like (ideas previously proposed here, and practices in the UK):

  • moving (in law) to committee-based decisionmaking,
  • having external members appointed directly by the Minister,
  • separate committees for monetary policy and the prudential regulatory functions,
  • a mandated greater degree of transparency, and
  • (something Joyce asked for advice on) making Treasury primarily responsible for the legislation under which the Reserve Bank operates.

As I say, time will tell.  But if National is back in office, they will presumably want to move quite quickly on appointing a permanent Governor (the Board, which is driving the process, meets again later this week), and whoever takes the role would presumably want to know what legislative arrangements they would be operating under.

It is well past time for the Rennie report, and associated documents to be released.  Doing so can’t have suited the current government, but this is an official document, paid for with taxpayers’ money.   And there can’t really be any credible grounds under the Official Information Act for withholding a months’-old consultants report to The Treasury on matters of organisation design.  In fact, in the current hiatus –  between Governors –  I would argue that there is a significant public interest in the release of the report now.


Who did Iain Rennie consult?

I’ve written a couple of times about the review former State Services Commissioner Iain Rennie has been conducting, at the request of the Minister of Finance, into two aspects of the governance of the Reserve Bank:

  • 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.

An earlier OIA request from a journalist saw The Treasury refuse to release the terms of reference for the report, but they did release the terms of engagement.  I wrote about that here.    We learned from that release that the report had been delivered to Treasury in mid-April.    We also learned that

In completing the work, the author will engage with an agreed set of domestic and international experts.


The key deliverable is a report, which will be peer reviewed by a panel of international experts.

I was interested to know who these experts were, and lodged an OIA request with Treasury.  No doubt, they could readily have responded in a day or so, but after four weeks they did finally respond yesterday.

Anyway, this was the list of “agreed domestic and international experts”.


and this was the list of reviewers


It is a curious list in many ways.    Setting aside the SSC people, of whom I know nothing but who are presumably knowledgeable on issues of governance of New Zealand public sector institutions, not a single one of the central bank experts (first list) has any experience of, or exposure to New Zealand (let alone actually being a New Zealander).

And Rennie, with Treasury’s agreement, appears to have consulted only current serving central bankers.   No doubt several will have had useful perspectives to offer on their own central banks’ experiences.  But the world of central bankers is a fairly clubby (or collegial) one, and you would have to think it unlikely that Rennie would have heard anything from these people that would cast doubt on how the arrangements their New Zealand peers operated under were working.   And among those current central bankers only one (Poloz, the Canadian Governor) has any stature in his own right; the others appear to be “corporate bureaucrats”, able no doubt to pass on information about how things work in their own central banks, but not self-evidently qualifying as “international experts” on central bank governance etc.

One might have supposed that any number of other people (even from abroad) could have provided valuable perspectives and insights.  For example, retired Governors and former members of decisionmaking committees, who are freer to speak their mind.   Lars Svensson, the leading academic and former monetary policy board member, wrote a review of our Reserve Bank in 2001 for our then-government.   Having had extensive experience as an insider since then, and retaining an interest in New Zealand, he would have seemed like a natural person for Rennie to have consulted.    In fact, there is not one academic on the list.   Not, for example, Alan Blinder, former vice-chair of the Fed and author of academic work on decisionmaking by committee.   There are no private economists on the list.  Not, for example, Willem Buiter now chief economist of Citibank and a former academic and member of the Bank of England’s Monetary Policy Committee.  And no one from abroad with, say, a Treasury perspective, or the perspective of a Minister.  Bernie Fraser, for example, had been both Governor of the Reserve Bank of Australia, and Secretary to the (Australian) Treasury.

And not a single person from New Zealand made the expert list?  Not Arthur Grimes, who was heavily involved in the design of the current system and later chair of the Reserve Bank Board.  Not Don Brash, who was Governor under the current system for 12 years.  Not thoughtful former Board members such as (for example) Hugh Fletcher.  Not people who had been involved from a Treasury perspective (especially in the years since Rennie himself left Treasury).  And, of course, no one who has written on the issues domestically.

You might, incidentally, be wondering why people from the Bank of Canada and the Bank of Israel top the list of experts.  That is likely to be because Canada is the only other advanced country central bank with the Governor as (formally) single decisionmaker (Canada has quite old central banking legislation, and the Bank of Canada has much narrower responsibilities than our Reserve Bank).  And until relatively recently, Israel also had the Governor as a single decisionmaker, before the legislation was overhauled and a mixed committee (internals and externals) took over the monetary policy decisionmaking role.  The Israeli experience should be interesting, but again you have to wonder why Rennie didn’t consult Stan Fischer, former Governor of the Bank of Israel, and now vice-chair of the Federal Reserve.

What of the international peer reviewers?  There were three, and each will have been likely to have added something in commenting on Rennie’s draft.    But, again, there is a distinctly “let’s keep this inside the club” feel to it all.   Goodhart, for example, is a respected academic economist, and former staff member and Monetary Policy Committee member at the Bank of England.    But he is now rather elderly, and has had a very strong relationship with the Reserve Bank of New Zealand over the years –   including as guest speaker at the (rather extravagant) 50th anniversary celebrations of the Bank, and then someone used as an expert witness  by the Bank at the parliamentary select committee when the current Reserve Bank Act –  governance and all – was being legislated (rather controversially) in 1989.

Donald Kohn is pretty highly-respected in international central banking circles.  So much so that Treasury omit to note in their description that, having retired from a career at the Federal Reserve, he is now a member of the Bank of England Financial Policy Committee, so still entirely within the central banking club.  He has visited the Reserve Bank and, from memory, wrote up his experiences pretty positively.

The final reviewer is David Archer, former Assistant Governor and Head of Economics at the Reserve Bank (and sometimes mentioned on lists of potential future Governors). He now holds a senior position at the Bank for International Settlements, a body owned by central banks (including ours) which describes itself thus

The mission of the BIS is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.

I worked with David closely over a long period, and he was usually pretty willing to speak his mind.  He certainly knew the Reserve Bank well –  at least in the days before financial regulation became so important, and before the Reserve Bank moved more back into the mainstream of central government as a major regulatory institution –  but you have to wonder quite how free he will have felt to offer views the Reserve Bank might be uncomfortable with – the Governor visits the BIS pretty frequently –  especially as those views will themselves presumably be discoverable in time.

So the offshore people consulted, or used as reviewers, seem as though they will have been a rather partial perspective on the issues at hand. No doubt, all provided some useful information and perspectives, but you can’t help thinking there could have been a lot more there if Rennie had sought it.  Then again, as State Services Commissioner his reputation was hardly that of someone keen on open government.  What is perhaps more troubling is that The Treasury was okay with all this.

Despite this published list, you have to wonder who else Rennie in fact consulted.  Why I do suppose there was anyone else?  Because, somewhat by chance, I also yesterday got a response from the Reserve Bank to an Official Information Act request for minutes of the Reserve Bank Board.

In the minutes of the Board meeting held on 30 March this appears

Rennie board

There follows almost three pages recording the details of the Board’s discussion with Rennie (and his supporting Treasury staff). every single word withheld (on somewhat questionable grounds).    Nothing else ever gets three pages of text in the Board minutes –  in fact, the process for appointing a new Governor is still not being minuted at all, even in this latest set of releases.

I don’t have any particular problem with Rennie consulting with the Bank’s Board.  They are likely to have some useful experiential perspectives to offer, but if the discussion covered almost three pages of minutes and –  according to Treasury –  no one else in New Zealand with any familiarity with central banking issues was consulted, it does all have the feel of an insiders’ job.  Perhaps that is what Steven Joyce wanted.  It isn’t what the situation requires.    Meanwhile, one can only hope that the report itself, along with the terms of reference, will be released before too long.

New Zealand isn’t the only country looking at these issues.  The Norwegian government just this week released an independent report they had commissioned looking at the future governance and mandate of their own central bank.  The summary report is very easy to read, and includes specific draft amendments to the law to give effect to the report’s recommendations.  Among those recommendations is a streamlined system of governance, with proposals for a monetary policy committee (40 per cent of whose members would be externals appointed by the government), and for a separate Board to which the Governor would be responsible in his role as chief executive of the Bank.    We can only hope that the completed Rennie report will be as clear and crisp.



The Rennie review

A couple of months ago we learned that the new Minister of Finance had requested Treasury to have a review done of two key aspects of the governance of the Reserve Bank:

  • 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.

Treasury, in turn, contracted Iain Rennie to conduct the review. Rennie was, until not long ago, State Services Commissioner.  And a bit earlier in his career he had been Treasury’s Deputy Secretary for macroeconomic policy, including all matters to do with the Reserve Bank.

Learning of the review, someone lodged an Official Information Act request with The Treasury, seeking (a) the terms of reference of the review, and (b) the terms on which Rennie was engaged.    Treasury’s response, dated 17 May, is here.

Somewhat strangely, the terms of reference for the review were withheld, allegedly to “maintain the constitutional conventions protecting the confidentiality of advice tendered by ministers and officials”.      Which seems strange because (a) the Minister had already talked to the media (first link above) about what the review would cover, and (b) because Rennie is neither a minister nor an official, just a consultant hired to provide some analysis and advice.  The terms of reference for that work hardly seem to amount to “advice”.   Treasury further state that the terms of reference are withheld “to enable Minister and officials to have undisturbed consideration of advice”.  I’m not clear that that is a statutory ground, and –  as importantly –  how knowledge of a consultant’s terms of reference would interfere with “undisturbed consideration of advice” is far from clear.

But Treasury did release Rennie’s terms of engagement, and some other interesting bits of information.   We learn that

The Treasury is contracting Iain Rennie to provide a report assessing governance and decision-making at the Reserve Bank.

Is this different, I wonder, than looking at the relevant statutory provisions (the implication  of the words is that the report will assess actual governance and decisionmaking, rather than the relevant laws)?  Perhaps not.  The wording might also be taken as implying that the review covers more than just decisionmaking for monetary policy.  If so, that would be welcome.

Pleasingly, Treasury seemed not just to be pushing a single option.

The analysis should outline a few alternative, coherent reform packages, and draw out the central design trade-offs, while making clear a preferred approach.

We also learn, and this did surprise me a little, that the contract period began on 7 February.  That was the day the Minister of Finance announced Grant Spencer’s appointment as acting Governor, having taken the relevant paper to Cabinet that morning.   If Rennie’s contract started from 7 February, presumably the Minister’s decision to initiate this review work had been taken some time earlier –  perhaps not long after he took office.

When he took the job, Rennie undertook to have his report completed by 31 March (in return for $60000 + GST).  In fact, the papers confirm that Rennie took longer than expected and, by mutual agreement, the final report was delivered to Treasury on 18 April.

In undertaking this contract, Rennie and Treasury agreed that

In completing the work, the author will engage with an agreed set of domestic and international experts

This seems a strange provision.  It suggests that Treasury could veto who Rennie could consult with in researching the issues and analysing the options.  It would be very interesting to know who these experts are –  perhaps especially the domestic ones.   (I’ve written extensively on the issues and wasn’t consulted –  not that I had expected to be.)  I will lodge an OIA request for that information.

Having received Rennie’s report, Treasury has a further step in the process, presumably before they pass on the report, and their own advice, to the Minister of Finance.

The key deliverable is a report, which will be peer reviewed by a panel of international experts.

Again, it would be useful –  and interesting to know –  which “international experts” they are consulting, and perhaps a little surprising that the peer review process does not appear to include people who might be expert in New Zealand public sector governance.  The Reserve Bank is,  after all, one government entity among many.

It would be good if we could get some clear answers from Treasury and the Minister of Finance as to when the final report, together with comments from the peer reviewers, might be available.   In his earlier comments, Steven Joyce told the Fairfax journalist that  “he expected Rennie to report back some time after May’s Budget”.   That was clearly somewhat misleading –  the original contract had a report back from Rennie by 31 March –  but even setting that aside, it is now after the Budget.    As this is an issue where the political parties differ –  Labour, the Greens, and (I think) New Zealand First already promising change –  it would be highly desirable to have this expert report, peer-reviewed by international experts, in the public domain as soon as possible.

In digging around, I stumbled across The Treasury’s 2001 advice to the then Minister of Finance on the recommendations of the Svensson inquiry into monetary policy and the Reserve Bank.  I’d seen it at the time, but long since forgotten it.  The principal author  of the paper was someone who is now a Treasury Deputy Secretary, but his boss –  also listed on the paper –  was one Iain Rennie, then deputy secretary responsible for matters macro.

Svensson had a number of sensible recommendations.  Until that time, the Governor had chaired the Reserve Bank Board, even though the Board’s main job was to monitor and hold the Governor to account.  That was clearly a nonsense, and Svensson recommended change.  That recommendation has been adopted and the law was changed accordingly.   But Svensson also recommended removing the Governor from the Board altogether –  it being, at very least, anomalous to have the Governor as a member of a body whose main purpose is to review his own performance (as distinct, say, from a business in which a Managing Director might be a member of the board, but in that case the Board has all the ultimate strategic decisionaming responsibilities).  The Police Commissioner, for example, isn’t involved in the governance of the IPCA.  Rennie and Treasury advised against making that change, even though they explicitly recognised what the role of the Board was.   Quite why is never made clear.

And then, perhaps more importantly, Svensson recommended that the law be changed to shift away from the single decisionmaker structure, in which all executive powers are vested in the Governor personally.  Even then, in 2001, it was an unusual model internationally.  Svensson proposed legislating to give an internal committee of senior Bank managers the formal decisionmaking powers.

Here was the response of Rennie’s wing of Treasury.

We believe the clear and strong accountability of the present structure has considerable merit.  The Governor is solely and clearly responsible for monetary policy performance and may be dismissed by the Minister in the event of inadequate performance.  While the Minister’s ability to dismiss a poorly performing Governor may be severely limited in practice, his ability to dismiss a poorly performing committee would be even more limited.

The formation of a decision-making committee would require extensive changes to the Reserve Bank Act.  The statutory responsibility for price stability that currently rests with the Governor, and the statutory relationship between the Minister and the Governor, would need to be amended to give effect to the responsibilities of the Committee.

The issues raised above suggest that the potential benefits of forming a formal internal decision-making committee are likely to be small.

Having taken such a stance then, one can only hope that in conducting his recent review, Rennie is rather more open to change than he was in 2001.   (I should add that I did not then, and do not now, think Svensson’s specific recommendation should have been adopted –  but there are other feasible approaches to adopting a collective decisionmaking model).  It is striking, for example, that in this Treasury advice there is no mention at all of how other government agencies in New Zealand are governed (hint: none involving policy setting involve single decisionmakers, with no rights of appeal).  It is also telling of how the Bank has changed –  by legislation and gubernatorial inclination –  that there is no discussion at all of how the financial regulatory powers of the Bank should be governed.  In many respects, the advice seems stuck in the 1980s –  when the Reserve Bank structure was first designed –  including with the emphasis on the ability of the Minister to sack an individual relative to a committee.  That was an important consideration in the late 1980s, but it isn’t one that has led us to have other government rule-making, policymaking, agencies governed by single (unelected) decisionmakers.

It is, of course, a little unfair to hold anyone to advice they offered sixteen years ago, and I’m not seriously attempting to.  Times and attitudes, and responsibilities, change. But it can be difficult at times for senior people to walk away from public stances on important issues that they have taken previously.   I hope that when we finally see the Rennie report, a willingness to approach the issue with a genuinely fresh set of eyes is evident.

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.