(This report has been updated at 11.26 am 26-03-2018)
Finance Minister Grant Robertson has overruled objections from both the Reserve Bank and his own advisory committee and is proposing to appoint a Treasury official to the new Bank committee which will decide the Official Cash Rate.
The Minister commissioned an independent committee headed by economist Suzanne Snively to review the Bank and yesterday he unveiled the first part of its report.
The report is part of a package of changes to the Bank announced this morning by Robertson with the new Governor, Adrian Orr, standing alongside him.
For the first time the Bank’s Policy Targets’ Agreement, which Robertson and Orr signed, goes beyond targeting inflation.
The Bank will now be required also to consider how the conduct of monetary policy will “contribute to supporting maximum sustainable employment.”
And instead of the Governor being solely responsible for the OCR, it will now be set by a seven-person Committee which will include three external representatives plus a representative from Treasury.
Robertson said the external appointees would be appointed on merit not because they represented any particular view on the economy.
“People will not be playing a representative role in the committee so it’s not a question of someone representing a particular sector group in society, it will be merit-based, ” he said.
Perhaps as a nod to the objections to Treasury being on the Committee, their representative will not have voting rights.
Robertson said that he wouldn’t describe the objections of the Bank and the advisory panel as a “violent opposition.”
“It was more around the question of what they thought of the value of it and the use of it,” he said.
“The Government has made a decision that there is value in it.”
Orr, however, was careful to emphasise that the Treasury official would not have voting rights.
“I believe an open and transparent decision-making environment is very very necessary so the Committee structure is fantastic,” he said.
“The fact that the Treasury are there as observers, and only observers, is very healthy.
“The Bank remains independent.
“To have confidence in your independence, you should be open and allow people to put views on the table or listen or share exchanges.
“So the Treasury is there, I believe, to better assist the co-ordination of monetary and fiscal policy but it is the monetary policy committee that has to make the decisions.”
Robertson said the Government wanted to see better understanding between the Bank and Treasury on fiscal and monetary policy.
“So there was a healthy disagreement in what I regard as a relatively minor matter in the greater scheme of things.”
But as the following earlier report sets out, there are also concerns within the Bank about the second phase of the review will go with Treasury already signalling that it has questions about the Bank’s role as a monetary stability regulator and its use of macro-prudential tools.
This stand off between Treasury and the Bank is not over yet.
Power struggle in Wellington (Published 26-03-2018, 04:00)
Finance Minister Grant Robertson will today unveil the first legislative changes in nearly 30 years to the way the Reserve Bank operates.
Two of the Bank’s fundamental founding principles will be changed.
The changes will be foreshadowed in a new Policy Targets’ Agreement which Robertson will sign this morning with the new Governor, Adrian Orr.
But they are only the beginning.
A review of the way the Bank operates its other supervisory activities including its macro-prudential controls like loan to value ratios is also underway.
Both the Minister and the Bank’s board have privately conceded that agreement on these matters will not be easy.
In fact, there is what appears to a power struggle going on between the Treasury and the Bank over how much independence the Bank should have.
Today’s changes will extend the Policy Targets mandate to include not just keeping inflation within a target range but also to consider the impact of any interest rate settings on employment.
And there will be a new way that the Bank makes its interest rate decisions.
Under current law, the decision is the sole responsibility of the Governor, although in practice they have drawn on internal committees in making that decision.
Now the role of the committee will be formalised and it will include external appointments.
The Minister of Finance will “approve” those appointments which critics will argue will reduce the independence of the Bank’s Governor.
In a paper attached to a letter sent to Robertson in January, Treasury Secretary Gabriel Makholouf argued that the overall effect of changes to the Reserve Bank’s practice and role since 1989 had been to “increase the risk and reduce the validity of the assumption that a single person can be held accountable for the decisions of the Reserve Bank.”
At a function to farewell Governor, Grant Spencer, last week, there was much talk by the senior Bank staff, politicians and banking industry people about the review.
Speeches at the function were off the record, but there seemed little disagreement with the proposal that the interest rate setting powers be transferred to a committee and that the committee consider more factors (probably just sustainable employment) than inflation in setting the Official Cash Rate. (OCR).
And that’s the bit that will be unveiled today.
But the review now enters Phase Two and much more contentious territory, because it will be looking at the Bank’s supervision of the stability of the financial system and its use of macro-prudential tools.
Simply, Treasury has proposed to Robertson that there are dangers in the Bank having the sole power to do this.
Friction (or rivalry) between Treasury and the Bank is not new.
It is said that after a power cut in Wellington, in November 1988 when then-Prime Minister David Lange had fired his Finance Minister, Roger Douglas and the financial markets went into a spin, Treasury and Bank officials spent part of the afternoon arguing over where a crisis meeting would be held.
With their lifts out of action neither institution’s staff wanted to walk the 12 or so floors to the other’s executive meeting rooms.
Now Treasury says the Bank’s increasing role as a financial regulator makes a difference.
“The increased focus on prudential regulation demands a much wider skill set for a Governor, which greatly exacerbates the key person risk of the single decision- maker,” the document sent to Robertson says.
To deal with this the document recommends reviewing the role of the Board which currently has strictly limited powers.
And the document acknowledges that there are differences between the Bank and Treasury over this.
“It should be recognised that there is no single “right” system for decision-making and governance,” it says.
“This is shown by the diversity of arrangements worldwide, and the fact that the Treasury and the Reserve Bank have different perspectives on some of the finer details of a reform package.”
Treasury suggests that the need for a change could be made more urgent were there to be a financial crisis.
And reading between the lines of its document it is clear it believes there should be more input both from the Minister and itself into the Bank’s decisions in such a situation.
“One issue to consider is appropriate co-ordination between monetary and fiscal policy” it says.
“ This could be achieved through informal measures and without the need for a legislative change.
“However, this may come with costs in terms of speed of decision, clarity of communication, democratic legitimacy, or distorted policy choices.
“ Another issue to consider is that unconventional monetary policy measures have fiscal implications, and the decision-making framework needs to be robust to take this into account.
“A review of the Act would allow a full set of options to be considered in respect of the adequacy of the stabilisation policy framework in the event of extreme events.”
In its summary of the arguments in its document, Treasury is blunter.
“The Act does not currently give the Minister effective and appropriate levers to determine or influence the degree of risk in the financial system that the government is willing to accept
“The Minister also requires tools to encourage consistency with other Government objectives relating to financial market efficiency, innovation, or competition.
“The Act requires changes to ensure the resulting economic and fiscal risk is adequately managed. A review of the financial stability policies in the Act could address Ministerial and Parliamentary oversight, transparency and certainty, and clarify the Reserve Bank’s role, responsibilities, and operational objectives without jeopardising its operational independence as a regulator.”
The Bank has had only four governors under its new legislation which was passed in 1989.
All — Don Brash, Aklan Bollard, Graeme Wheeler and Grant Spencer — have by nature tended to be staunch defenders of the Bank’s independence to the point where some Finance Ministers probably regarded them at times as obstinate.
Adrian Orr, who starts today as Governor, has a reputation as a very politically adept public servant.
He may be exactly what the Bank needs as it enters the coming battle over its future.