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Reserve Bank focus needs to be clarified - NZ Initiative

Fuseworks Media
Fuseworks Media

Following the larger than anticipated cut in the cash rate, the Reserve Bank of New Zealand has signalled its preparation for unconventional monetary policies such as negative interest rates and quantitative easing.

But such a move requires an urgent clarification of the Remit given to the RBNZ’s Monetary Policy Committee, argues a new research note by The New Zealand Initiative.

The research note, The Unreserved Bank of New Zealand, is co-authored by Professor Robert MacCulloch of Auckland Business School and the Initiative’s Executive Director Dr Oliver Hartwich and Chief Economist Dr Eric Crampton.

Commenting on the publication, Dr Hartwich said: "There are reasons to be concerned about the direction of the RBNZ. The Bank itself says it is moving into fiscal policy, which is normally the domain of the Minister of Finance. At the same time, the Remit given to the RBNZ requires it to support the Government’s general economic objectives. Taken together, this could weaken the RBNZ’s independence and call its focus on price stability into question."

The paper argues that the RBNZ should clarify that it will pursue price stability and maximum sustainable employment even under circumstances of unconventional monetary policy and will not consider other objectives better suited to more traditional fiscal policy. The Minister of Finance and the RBNZ Governor should therefore agree on a rewording of the Remit to the Monetary Policy Committee to make this clear beyond doubt.

Said Dr Hartwich: "The reputation of New Zealand’s Reserve Bank is at stake. Markets need to be reassured that there will be clear delineations between monetary and fiscal policy."

The research note, The Unreserved Bank of New Zealand: Why unorthodox monetary policy needs boundaries, is attached at the bottom of this page.

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