New Zealand’s government has given the Reserve Bank’s Monetary Policy Committee a fresh remit containing an expanded section of context that the central bank didn’t want included because of concerns it could undermine its independence.
(Bloomberg) — New Zealand’s government has given the Reserve Bank’s Monetary Policy Committee a fresh remit containing an expanded section of context that the central bank didn’t want included because of concerns it could undermine its independence.
The current monetary policy framework remains fit for purpose and the RBNZ’s operational objectives are unchanged apart from minor changes to wording, Finance Minister Grant Robertson said Tuesday in Wellington. The inflation target remains 1-3% over the medium term with a focus on the 2% midpoint, and the second objective of supporting maximum sustainable employment is retained.
However, Robertson has accepted Treasury Department advice to expand the “context” section of the remit, which directs the MPC to consider factors including government objectives when it makes interest rate decisions. The RBNZ wanted that guidance excluded from the remit because of implications for its independence, Treasury documents show.
“The RBNZ would prefer that any guidance related to broader government objectives is excluded from the remit and charter, in order to avoid additional complexity, and to avoid contributing to a perceived erosion of the MPC’s operational independence,” the Treasury said in April 27 advice to Robertson released Tuesday.
It said the RBNZ feels there are other ways in which the finance minister could influence the factors the MPC considers when formulating monetary policy.
“These options will be less direct than making amendments to the remit,” Treasury said. “For example, the annual Letter of Expectations could include the guidance outlined above, but these expectations would be addressed to the RBNZ’s board, not the MPC. The board is not responsible for the formulation of monetary policy.”
What’s Changed
The expanded “context” section of the remit now states that the MPC “should be aware of the broader context in which monetary policy is conducted.”
“Where appropriate the MPC should seek to understand and communicate material interactions between monetary policy and the government’s economic objectives,” it says.
Members should continue to assess the effects of policy on the government’s objective of supporting sustainable house prices, a directive that was inserted into the remit by Robertson in early 2021 and which has now been lifted into the context section.
The MPC must now also explain “how financial risks were considered in choosing the mix of monetary policy tools when announcing changes to monetary policy that would materially increase the Reserve Bank’s exposure to financial risk,” it says.
The committee should also seek to “understand material interactions between fiscal and monetary policy” and support information-sharing between monetary and fiscal authorities, it says.
Robertson also made some minor changes to align the remit wording with the Reserve Bank of New Zealand Act and to “improve clarity.”
They include requiring the MPC to “achieve and maintain” rather than “keep” inflation within the target range, and to “discount disturbances to inflation that are expected to be temporary.”
(Updates with Treasury documents)
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