Government may fast-track RBNZ reforms

The Government could make changes to the central bank as early as March by appointing a reforming governor and making a prompt shift to policy settings, a former bank official and economists say.

An opening at the top of the Reserve Bank of New Zealand (RBNZ) gives the fledgling Government the opportunity to make full employment a focus alongside inflation, pre-empting a more lengthy legislative process.

Much could be accomplished by a quick rejig of the Policy Targets Agreement (PTA), which sets out the conditions for achieving the bank’s monetary policy target, former Reseve Bank¬†official Michael Reddell said.

“If you get a new governor who is broadly sympathetic to the direction you want to go in, you can write quite a lot into the policy target agreement,” he¬†said.

“To my mind that’s going to be one of the tests as to how serious they are, as to whether they really want to change the bank.”

A source familiar with the matter said the Government will stick to the current policy target agreement at least until a new governor is appointed.

The Government has said it will review the Reserve Bank Act to include employment to its mandate which currently focuses solely on inflation.

It could also make the exchange rate a higher priority in the PTA to satisfy the government’s junior coalition partner, New Zealand First, which favours lowering the local currency to boost exports.

A greater focus on employment would mark a shift for the first central bank to introduce an official inflation target in 1989.

The proposed central bank changes are already working to depress the New Zealand dollar, said Wellington-based dealer at OM Financial, Stuart Ive, with the Kiwi dollar down more than 5 per cent since before the election.
“There’s concern from financial markets around reform of the RBNZ and they will be very keen to see what those details actually are,” Ive said.

Regarding the bank’s top job, the Government could avoid rocking the boat by opting for someone like deputy governor Geoff Bascand, if his name is put forward by the board, analysts said.

Bascand, who told local media he has applied for the job, declined to comment.

Another possible candidate being discussed is Adrian Orr, the chief executive of the highly regarded New Zealand Superannuation Fund and a former deputy governor at the RBNZ.

Orr had a reputation as a straight talker and for shaking things up at both institutions, according to Reddell.

Orr declined to comment.

While changes to the central bank mandate could lead to looser monetary policy, any shift would also be symbolic after almost a decade of rule by the centre-right National party.

“The Reserve Bank Act has become a symbol for many on the left of neo-liberalism and therefore for the government to make some changes to the Reserve Bank Act and changes to the way the Reserve Bank works is politically important,” said Bryce Edwards, political analyst at Critical Politics in Wellington.