Ruth calls it straight

Ruth Richardson writes:

As inflation rears its ugly head again, New Zealand First proposes stripping the Reserve Bank of its sole mission to fight inflation. In an exercise in virtue signalling, employment is bolted on as a second mission. Labour’s Barbara Edmonds wants the same.

This is sheer monetary policy vandalism, flying in the face of all the evidence that there is no trade-off between price stability and employment. That monetary policy can permanently deliver employment growth is nothing more than a cruel hoax.

This is very well known. If monetary policy could lead to permamently higher employment, then we would have examples of countries where it has. There are none.

New Zealand should not have to re-learn the harsh lessons of the loss of monetary policy credibility. Successful inflation-fighting involves getting two things right.

First, the central bank must have a clear, singular inflation mandate. That’s what anchors inflation expectations. If markets and workers believe the bank might tolerate higher inflation to chase employment goals, inflation expectations build, making inflation itself harder to control. That’s a formula for making everyone worse off, employment included.

Confidence in a central bank preventing higher inflation is critical. We have seen what happens when you lose that.

A single mandate gives a clear yardstick: did inflation stay near target or not? With two goals, a central bank always has an excuse. If inflation is high, it can point to labour market weakness as the reason it didn’t tighten harder and vice versa. That ambiguity weakens accountability and lets the bank dodge the blame for missing either target.

Yes, a dual mandate reduces accountability.