Federated Farmers Submission Reserve Bank Act Review (Phase 1)

Federated Farmers welcomes the opportunity to submit to the Treasury on the Reserve Bank Act Review (Phase 1).  Federated Farmers has supported the Reserve Bank Act 1989 since its inception.  We particularly support the enshrining in the Act of the Reserve Bank of New Zealand’s (RBNZ’s) operational independence with clear accountability and the Act’s single monetary policy objective of price stability. We consider the Reserve Bank Act to be (along with the Public Finance Act 1989) a critical cornerstone of economic policy. 

It is appropriate to review periodically whether institutions and arrangements are working effectively and if improvements can be made.  In the case of monetary policy, it has been over a decade since the last review, the 2007 Finance & Expenditure Committee’s Inquiry into the Monetary Policy Framework.  It is therefore timely to have a review of the Reserve Bank Act but we also believe that it should not presuppose an outcome and “if it ain’t broke don’t fix it”.   Federated Farmers believes that the framework provided by the Reserve Bank Act has meant that monetary policy has worked very effectively for the past 28 years and much more effectively than during the preceding 28 years.  This despite a number of serious economic shocks, most recently the Global Financial Crisis and the Christchurch earthquakes.  

A review is one thing but Federated Farmers is concerned that the cases for the review’s proposed changes have not been adequately made and there are serious risks with them.   We strongly prefer that no changes be made to the Act but in this submission we will offer some suggestions for how changes could be made that might reduce the risks associated with them. Federated Farmers recommends that:
  (a) Price stability should remain the single monetary policy objective in the Reserve Bank Act.
  (b) If the Government wishes to provide the RBNZ with an employment objective then it should be:
      •  Placed in the Policy Targets Agreement rather than the Reserve Bank Act.
      •  Stated as a factor the RBNZ should have regard to when pursuing the objective of price stability.
      •  Defined as the ‘non-accelerating inflation rate of unemployment’. 

  (c) A formal Monetary Policy Committee should be an internal committee, but if external appointments are to be made they should be a minority of the committee members, they should not be political appointments, and they should be sufficiently expert on economics and monetary policy. 
  (d) Any changes to the RBNZ’s role in the financial sector, especially if they involve more heavy handed regulation, should be very carefully considered to minimise the risks of unintended consequences.