The Treasury released papers last week recommending that the Reserve Bank 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 Reserve Bank 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.
- Should the RB Governor solely determine the OCR
- 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.
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.