Reserve Bank dual mandate: Government goes against officials' recommendation to only issue new remit 

But Nicola Willis says "the way that we want to do it" will provide more clarity.
But Nicola Willis says "the way that we want to do it" will provide more clarity. Photo credit: Getty Images.

Treasury officials have recommended the Coalition Government doesn't amend the Reserve Bank Act to remove the dual mandate, and instead only issue a new remit to the bank's Monetary Policy Committee (MPC).   

This week the Government will push through under urgency new legislation narrowing the Reserve Bank's focus solely onto achieving price stability and away from supporting maximum sustainable employment (MSE).    

This was an election promise from both National and ACT, which have argued the addition of MSE to the Reserve Bank's mandate by the previous Labour Government distracted from it focusing on inflation, which has been beyond the target band for more than two years.    

However, officials at Treasury have argued rather than amending the legislation as the Government intends, it should issue a new MPC remit that clearly signals to the bank the importance of price stability.    

"The Treasury is supportive of an approach to monetary policy that more clearly prioritises achieving price stability," a Regulatory Impact Statement for the removal of the dual mandate said.   

"Owing to the value of an enduring and stable legislative regime for the Reserve Bank, the Treasury's preference is for a new MPC Remit (only) to be issued, although it is recognised that issuing a new MPC Remit without amending the Act cannot fully meet the Government's commitment to remove the dual mandate."   

Issuing a new remit would be "sufficient to ensure monetary policy decision makers focus primarily on achieving and maintaining price stability".   

Treasury does acknowledge, however, that amending the Act would "signal a greater focus on price stability" than a new MPC remit would achieve alone. It also recognises this is the Government's preferred approach and is expected by the market.     

Finance Minister Nicola Willis said changing the law would "provide more certainty and clarity to everyone".   

"The advice that we received was, yes, there was another way that we could potentially do this but that the way that we want to do it, we think provides a lot more clarity," she said.    

"We want the Reserve bank focused on one job: fighting inflation. We don't want there to be any confusion about that."   

She said advice showed that providing clarity about the Reserve Bank's focus on fighting inflation could reduce people's expectations of future inflation, which in turn, "can help bring inflation down".    

Speaking at a post-Cabinet press conference earlier this month, Willis said the previous move to establish a dual mandate went against 30 years of success in tackling inflation.   

"Our Government is making clear that on our watch, inflation is enemy number one. Stable inflation is the prerequisite on which maximum sustainable employment rests. Obviously, this is just one change we are making in our fight to beat inflation."   

Finance Minister Nicola Willis.
Finance Minister Nicola Willis. Photo credit: Getty Images.

Officials preferred the remit option as they said it would achieve the Government's intention to restore the focus on price stability and ensure the regime is "stable and enduring" - meaning the public and market can have confidence in its independence.   

"The Reserve Bank's statutory framework is of considerable interest to market participants, and changes to it – or the use of some options – may trigger market concern."    

A remit is also the quickest and least-resource intensive way to set priorities and reflects international best practice - a number of central banks now have dual mandates, Treasury said.  

Labour's finance spokesperson Grant Robertson noted while the Government had said it would change the legislation, Treasury was "highlighting that this is unnecessary".   

"Certainly, the remit is an agreement between the Minister of Finance and the Governor of the Reserve Bank. It does allow for flexibility," he said.    

"I think the other interesting element of the Treasury's advice is that they are saying that this change could lead to instability within the financial markets. They're effectively saying there that, you know, you shouldn't change monetary policy on a whim."   

Robertson's also concerned the Bill won't be going to a Select Committee due to it being passed under urgency.   

"When we made the change going in the other direction, we had a long consultation period with the public and then a Select Committee process for that. This kind of legislation, the Reserve Bank Act, is quite critical to the way we do it job in New Zealand as economic managers and I think it should go to a Select Committee."   

Labour finance spokesperson Grant Robertson.
Labour finance spokesperson Grant Robertson. Photo credit: Getty Images.

A leaked Cabinet paper seen by Newshub showed the Government was removing the requirement for Regulatory Impact Statements for proposals to repeal legislation as part of its 100-day plan.   

The statement for the dual mandate change says it was "produced under compressed timeframes" due to the policy being a "key priority for the Government and was campaigned on prior to the 2023 General Election".   

The Regulatory Impact Statement also considers whether the inclusion of MSE has had an impact on the Reserve Bank's ability to target inflation.   

"Although MSE is now considered as part of the decision-making process, the dual mandate has not made a material difference to the outcomes of monetary policy decisions since its introduction, according to the Reserve Bank."   

This has been because the two objectives – price stability and MSE - "are aligned over time", it said.   

"Removing the dual mandate from the Act would be unlikely to alter the general stance of future monetary policy decisions except for in the rare circumstances where these objectives may be misaligned."    

Treasury noted a Reserve Bank review of monetary policy between 2018 and 2022 found the MPC's inflation and MSE objections "have not been in conflict".  

It also said "giving the price stability objective a greater weighting than MSE in the MPC Remit would be 'unlikely to alter the way monetary policy is formulated in practice, and it could provide benefits in clarifying how the MPC operate'."   

The dual mandate not only affects the decisions made by the MPC but also perceptions of its focus, Treasury said.    

"Expectations can have a significant impact on inflation outcomes. When the dual mandate was introduced, the 2018 Regulatory Impact Statement noted the 'risk that market participants… interpret the Reserve Bank's new employment objective as weakening its focus on inflation'."    

Returning to a single mandate would "mitigate the risk" that the committee's consideration of MSE "contributes to higher-than-otherwise inflation".    

"Perhaps more importantly, it may influence perceptions of the Reserve Bank's willingness to take action – which may itself support the achievement and maintenance of price stability."   

Treasury and the Reserve Bank had already said the remit should "make clear that the employment objective is subordinate to achieving price stability".    

"In the Reserve Bank's review of monetary policy, it was recommended that the MSE measure be refined to provide further clarity about its nature and how it fits within the MPC Remit, as this is 'somewhat opaque and is not well understood by the public'."    

It had been suggested that the remit set out a hierarchal ordering of the dual objectives to "clarify that achieving price stability is an important prerequisite to pursuing other objectives".