Reserve Bank decision making

October 3rd, 2013 at 2:00 pm by David Farrar

Hamish Rutherford at Stuff reports:

The lobbied for the governor of the to be stripped of the right to solely decide on interest rate decisions, saying it created risk of “poor judgment”.

When Alan Bollard confirmed that he would stand down from the role last year, senior Treasury officials wrote to Finance Minister Bill English suggesting decisions on the official cash rate (OCR) should be made by a committee, rather than having the decision rest solely with the governor.

“Internationally it is usual to have a committee approach, with a range of possible committee structures,” senior analyst Renee Philip wrote last year, adding that the role of the Reserve Bank had broadened.

“The current single-decision-maker approach poses risks, such as a greater risk of poor judgment by a future governor than with a committee.

This is a worthwhile debate to have.

As I understand it, the Reserve Bank does have a committee that discusses the official cash rate settings, but it is advisory not decision making. One could have it as the official decision maker. It wouldn’t change the decisions, but would give some greater certainty. However it might reduce the accountability of the Governor, as he or she is the one who can be sacked if underlying inflation persist outside the agreed target range.

BNZ, Westpac, NZIER, Infometrics and Berl economists appeared to back the idea of a decision-making committee.

According to the Treasury, BNZ feedback was that a “committee internal to [the Reserve Bank] would ensure against risk of a future rogue governor”.

The Green Party said the advice of the Treasury aligned with its position.

No, it doesn’t. The have said they want a committee to decide, but there is a key difference with Treasury advice. Treasury have said (and most international models are like this) that the committee should comprise senior staff of the Reserve Bank – ie be an internal committee.

The Greens want an external committee where they and/or sectoral interests such as unions, farmers and manufacturers have representatives on the committee. That has considerable danger.

12 Responses to “Reserve Bank decision making”

  1. swan (777 comments) says:

    “BNZ, Westpac, NZIER, Infometrics and Berl economists appeared to back the idea of a decision-making committee.”

    I didn’t know Berl employed any economists.

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  2. anonymouse (891 comments) says:

    One problem I could see with a committee, internal or not, is that the Minister of Finance has a contract with the Governor regarding price stability, As the Governor is currently the one with the power to decide interest rates, the responsibility lies solely at their door.

    If you stripped the Governor of this power and gave it to a committee, A future governor could legitimately argue that he could not sign a policy targets agreement, as it was not in their power to be able to put it into effect….

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  3. RRM (12,545 comments) says:

    Surely the committee needs to be an expert one made up of the reserve bank’s best technocrats?

    I don’t mind having politicians decide whether we’re going to be racing in a Holden or a Ford, but either way I want competent and highly-skilled mechanics building the engines. Not “Dr” Norman. Ta.

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  4. alloytoo (1,037 comments) says:

    The greens suggestion is like allowing poachers to have a say on the allocation of game wardens.

    The reality is that any reserve bank Governor is going to have a core group of advisers, you can have a debate about formalizing that group, though I doubt it would make any significant difference in reserve bank policy.

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  5. georgebolwing (1,051 comments) says:

    New Zealand has been unique in having a very transparent model, with very clear accountabilities. The Reserve Bank of Australia and the US Federal Reserve both operate under out-dated legislation and have fudged the transition to the modern approach of independent monetary policy focussed on price stability.

    So if NZ was to move to a policy committee model, I would like to see it also done very transparently, as was the case in the UK with the Bank of England Act 1998. Their model is also very transparent, with very clear accountabilities, it is just that a group of people make the decisions.

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  6. Ross12 (2,499 comments) says:

    alloytoo +1

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  7. Pita (366 comments) says:

    I’m sure the Greens would also like to have a political representative in the committee, a cadre in effect, to ensure that the decision making process did not stray from the desired political objective.

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  8. lastmanstanding (1,724 comments) says:

    Please don’t mess with the current model It aint perfect but its worked better than almost any other system for the past 25 years.
    For Gods sake don’t let polllies anywhere near it. Look at the shambles in countries where the pollies get to decide fiscal policy.

    We have been served by excellent Govs in the past and Im sure Mr Wheeler will prove himself if he is let alone to get on with it.

    For those of us who remember the days of 25% plus over night interest rates ( yes it did happen children look up your history books circa 1985/86) we don’t want a return to those days. Good grief one of my jobs as accountant at a large public company was making sure all the cash including petty cash was banked before 3pm each day so we could partake of the overnight rate.
    Mortgage rates were north of 20% for 1st mortgage 25% for 2nd mortgage.

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  9. Positan (460 comments) says:

    When was the last time the Greens were heard to utter anything remotely close to reasoned, practical or workable input on any political issue or matter of administrative debate?

    Their “output” and utterances are always “political” stances, virtually always proven to be devoid of rationale or even elemental understanding. It’s a mystery why they feel so compelled to air electorally suicidal shortcomings and inabilities as often as they do.

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  10. wiseowl (2,273 comments) says:

    But look what has happened today.
    Wheeler suggests interest rates may reach 8% and the dollar strengthens against US dollar.
    This single focus keeps punishing the export sector (except for dairy) and rewarding the consumer with cheaper TV’s.
    There has to be a better way.
    We still have the highest interest rates in the western world and I’m convinced that distorts our economy.
    Time for Bitcoins?

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  11. cha (6,209 comments) says:

    Bitcoins huh.

    The court filing revealed that the site generated sales totaling over 9.5 million Bitcoins, with a commission of over 600,000 Bitcoins. Although the value of Bitcoin fluctuates continuously, authorities estimate that Silk Road processed $1.2 billion in transactions and took in approximately $80 million in commission fees.
    According to the New York Times, authorities said they seized 26,000 Bitcoins worth about $3.6 million. It’s likely that any Bitcoin that was recently processed through Silk Road is now lost.

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  12. unaha-closp (1,600 comments) says:

    The problems with committees is that they can easily be led in a convincingly deniable fashion. The very opposite of what you want out of any public institution.

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