A key point the Greens gloss over

October 11th, 2013 at 2:00 pm by David Farrar

has blogged at Frog Blog:

The  released papers last week recommending that the move towards a committee structure for making future decisions on the Official Cash Rate (OCR). New Zealand is now alone in relying on a single person – the Governor – to set the OCR. No other country in the developed world leaves such an important decision to one person.

Treasury gave the following reasons for why it supports the move to a board/committee governance structure:

Note the use of the term board/committee. The difference may seem unimportant, but it is not.

There are two seperate but related issues.

  1. Should the RB Governor solely determine the OCR
  2. If a group should determine it, is the group appointed by the Reserve Bank or appointed by Ministers of the Crown?

There are pros and cons for the 1st issue. You may lose the ability to hold the Governor accountable if he (or she) is not the decision maker, but as Treasury has pointed out there is greater security in shared decision making.

But even if you accept (1), the details of (2) are vital.

To re-ignite this important debate publicly, I’ve drafted new law in the form of a member’s bill to make this simple, uncontroversial change to the Reserve Bank’s governance structure along with the timely publishing of board minutes – another standard practice elsewhere in the OECD that improves the transparency of the Reserve Bank’s decisions.

Dr Norman’s bill would see the Reserve Bank Board set the OCR. The Board are appointed by Cabinet, and his proposal would allow Ministers to appoint people to the Board with a view to lower the OCR, even if it is inflationary, to help the Government out with a short-term growth issue. It would weaken the independence that we currently have.

The Reserve Bank itself noted in a review that in most countries with decisions by committee, the members are mainly internal. Dr Norman’s bill would see the decision made by external people only.

Treasury in their advice say:

There are several ways to construct a Committee; we are focussing on just using senior RBNZ staff to form the Committee to deal with concerns about conflicts of interest and difficulties in finding many experts to serve on the Committee.

An internal bank committee is a very different beast to the RBNZ Board which is appointed by Ministers. The Greens have tried to gloss over this key difference and make it look like Treasury are in support of their bill – which isn’t quite the case.

Having said that if Dr Norman’s bill is drawn, I would support it going to select committee. The issues are worth a parliamentary debate. I can be persuaded in favour of change – but not if the committee responsible for the decisions is the RBNZ Board, as that would be inappropriate and reduce the independence of the Reserve Bank.

 

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13 Responses to “A key point the Greens gloss over”

  1. RRM (10,001 comments) says:

    So Dr Norman’s puppets could set the OCR in accordance with his ideology, and then the Rt. Hon. Dr Norman gets to sack the RB Governor for non-performance if inflation rises?

    Nice system! :-)

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  2. Alan (1,087 comments) says:

    The RB operates within the bounds of a mandate given to it by parliament.

    The people, via parliament can change it’s mandate and the criteria and targets it works to at any time.

    It has no god given right to exist, it’s survival is “at will”.

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  3. Harriet (5,085 comments) says:

    Aussie has outside people on the board – and it works well. Varied experiance in the economy makes better decision making. The board is usually about spot on with the rate too – not too high not too low. Economists who work outside of the RB in different areas of the economy quess what the upcoming rate will be, and it’s usually the same as the board’s decision.

    It’s a good system as the markets, business, and home borrowers don’t end up ‘shocked’ by an announcement from the board, as the minutes from the previous meeting give detailed reasons as to why the rate was set as such, giving the public an indication as to where future rates are heading.

    My experiance is that people in oz just ‘get on with it’ when a rate is increased, whereas, back in NZ people fretted over it.

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  4. mikenmild (11,588 comments) says:

    The board at the moment recommends who should be the governor and holds that person to account for how the governor’s powers are exercised. So the difference being talked about is whether the board’s powers are widened slightly or whether the governor should appoint a committee of his or her subordinates to question his or her decisions.

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  5. Michael (910 comments) says:

    I prefer that the Governor has the final say and takes responsibility for their actions, but I’m pretty sure they always take advice and consider any action carefully and don’t just use the magic eight ball or coin toss to determine what the OCR should be.

    I am concerned the the RB independence is under threat with Labour promising to legislate to make first home buyers able to borrow up to 95% and the Greens wanting a politically appointed committee approach to OCR setting. One of the strengths of our economy is that we have had a bi-partisan commitment to price stability since the mid 80s. But that is looking shakier by the day.

    Another strength has been ensuring fiscal stability by transparency in our Government books with future liabilities having to be projected for and accounted for. If price stability goes, surely the next step is to go back to pay as you go accounting with no consideration to how affordable schemes will be in ten or twenty years.

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  6. mikenmild (11,588 comments) says:

    The current board is Dr Rod Carr, Professor Neil Quigley, Ms Sue Sheldon, Mr Keith Taylor, Ms Kerrin Vautier, Mr Jonathan Ross and Ms Bridget Liddell. One could ask whether this group, or their replacements, should have a stronger role in setting policy or should they just supervise the governor.

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  7. Camryn (543 comments) says:

    The key thing about governance is that you keep it completely seperate. Boards watch, management does. Blurring those roles is a recipe for disaster. There’s some scope for individuals to be both on a board and in management, but collectively “being involved” and “standing back, observing, and providing detached advice” must not be blurred together.

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  8. Ross12 (1,453 comments) says:

    “An internal bank committee is a very different beast to the RBNZ Board which is appointed by Ministers. The Greens have tried to gloss over this key difference and make it look like Treasury are in support of their bill – which isn’t quite the case.”

    This is exactly right DPF. I’m sure there is probably an informal committee or group within the RB now and the Governor is effectively the “front man with the deciding vote, if needed”

    This is just Norman trying to grandstand, again.

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  9. b1gdaddynz (279 comments) says:

    I’m not too fussed whether it is an individual or a board/committee just as long as they are independent of the Government; the role they play is too important to be hijacked by political ideology especially by a man who would likely fail Economics 101!

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  10. mikenmild (11,588 comments) says:

    The funny thing is they’re not really independent of the government at all. The government chooses the board, which recommends a governor for appointment. It’s a device to make it seem like independence of the central bank is some sort of constitutional bedrock.

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  11. Johnboy (16,980 comments) says:

    Allowing a failed Aussie communist to have a say in how New Zealand’s fiscal policy will be determined is a very dangerous path to tread.

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  12. burt (8,301 comments) says:

    Perhaps we could call the RBNZ committee the ‘Muldoon by Committee’ committee.

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  13. Jman (84 comments) says:

    Another alternative is to adopt the Taylor rule:
    Set the OCR to 8.5 + 1.4*(Core inflation – unemployment rate)
    Having a rule, rather than the discretion of a human being makes it non-political and completely transparent.

    http://en.wikipedia.org/wiki/Taylor_rule

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