New Zealand Finance Minister Grant Robertson ignored Treasury and Reserve Bank recommendations that the central bank’s employment objective be explicitly designated as secondary to price stability.
(Bloomberg) — New Zealand Finance Minister Grant Robertson ignored Treasury and Reserve Bank recommendations that the central bank’s employment objective be explicitly designated as secondary to price stability.
In a new remit for the Reserve Bank’s Monetary Policy Committee, Robertson made only slight changes to the wording around the two operational objectives. Those changes are intended to provide a clearer signal that price stability should be the committee’s primary focus, he said in a cabinet paper dated June 21 released late Tuesday in Wellington.
“The current wording already implies a hierarchical ordering of the objectives,” Robertson said in his cabinet paper. “I have therefore considered it redundant to specify that the employment objective ‘is subject to’ the price stability objective.”
Robertson introduced the dual mandate in 2018, adding the objective of supporting maximum sustainable employment. As New Zealand inflation surged to a three-decade high last year, the government and the RBNZ came under fire for not having price stability as a primary concern.
The main opposition National Party has pledged to return the central bank to a single mandate if it wins the October general election.
In the new remit, the MPC is required to “achieve and maintain” future annual inflation in a 1-3% band, and to “support” maximum sustainable employment. Previously the MPC was required to “keep” inflation in the band.
In advice to Robertson during the review of the remit, the RBNZ said introducing “a hierarchical ordering of objectives” would on balance be beneficial because it would “enhance the clarity of the remit and support the MPC’s credibility in inflation targeting.”
The RBNZ cited research that showed the two objectives generally aligned over time and there hasn’t been a need for trade-offs between inflation and employment. However, in a situation where the economy is facing more powerful supply shocks, the research “suggests it is better for monetary policy to focus only on the inflation target.”
In conclusion, the RBNZ said hierarchical ordering would maintain the benefits of the employment objective while also providing clarity to the public on how the MPC will respond to situations when policy faces those trade offs.
The Treasury supported the RBNZ’s position in advice to Robertson last month.
It recommended making the maximum sustainable employment objective subject to price stability, saying this would provide “a stronger anchor for inflation expectations.”
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