N.Z. Treasury Saw Risks in RBNZ Governor as Sole Rate Setter

New Zealand’s Treasury told the government last year there are risks in the Reserve Bank governor being the sole decider on interest rates and it should consider a move to a committee structure, internal documents released under the Official Information Act show.

“The current single-decision-maker approach poses risks, such as a greater risk of poor judgment by a future governor than with a committee,” the Treasury wrote in a report on the Reserve Bank’s Policy Targets Agreement dated May 10 last year. “On balance, we think there would be benefits to moving towards a monetary policy committee in future.”

While Reserve Bank documents released to the Green Party in August showed the Treasury had urged a review of the governor’s powers, they didn’t outline the Treasury’s concerns, as these documents do. Finance Minister Bill English said last month that the government wasn’t considering a change to the central bank’s decision-making structure.

Most central banks from developed nations, including the U.S. Federal Reserve, Bank of England and European Central Bank, take policy decisions by committee. The Green Party is campaigning for a change to allow the New Zealand central bank board to make the decision, arguing the governor’s current power leads to poorer decisions that don’t reflect the wider economic interests at stake.

“It is time for there to be a serious debate about improving decision making and accountability at the Reserve Bank, and to bring our decision making into line with other central banks,” a Green Party spokesperson wrote in an emailed statement.

Accountability

The RBNZ declined to comment, Head of Communications Mike Hannah said by telephone yesterday.

“I don’t think anyone has been able to show that there’ll be a significant gain” from changing the decision-making model, English said in a Sept. 18 interview. “Our governor effectively uses a committee to make the decision and we don’t see any particular gains from changing it. The feature of our system is very clear, accountability, and that’s our preference.”

In the paper dated May 10, 2012, the Treasury said it had reconsidered its initial opposition to the RBNZ moving to a policy committee.

“New Zealand’s model increasingly looks out of line with common international practice,” it wrote, noting the Bank of Israel was the most recent central bank to move to a committee structure. It said the RBNZ’s role had broadened and this “may increase the range of skills required by a future governor.”

Final Decision

Furthermore, “our external engagements with private economists have indicated a preference for a committee structure,” the Treasury wrote. “Their views seemed more about minimizing future risk of poor decisions rather than a sense that decisions have been poor in the past.”

The Reserve Bank governor makes the final decision on interest rates after taking advice from officials who don’t vote and whose deliberations aren’t released publicly. The Treasury noted there is “no requirement” for the Advisory Group to be a permanent feature.

The May 2012 paper was advice for English in anticipation of a new policy targets agreement after Alan Bollard announced he would not seek another term at the helm of the RBNZ. Graeme Wheeler took over on Sept. 26 last year.

“The end of the governor’s term provides a natural opportunity to consider whether there should be changes to the PTA,” the Treasury wrote. It recommended increasing the focus on the 2 percent mid-point of the 1 percent to 3 percent inflation target -- advice adopted by English and included in the new PTA.

Reserve Bank Act

It said changes to the decision-making model would require alterations to the Reserve Bank Act, and the hurdle for change should be high.

“However, in principle there are potential benefits of a committee model, although these would depend on the design of the committee,” it said.

“Further work to consider options for a committee structure would ideally be undertaken in conjunction with the Reserve Bank, although no such work is currently planned. We recommend that you discuss the merits of a monetary policy committee with the incoming Governor with a view to reaching a decision on the merits of a committee and implementing any changes within the Governor’s first term.”

Since his appointment, Wheeler has established a governor’s committee including his two deputies and the assistant governor to oversee all policy decisions.

“Although in the RBNZ’s case they have a single decision maker, they’ve set up internal committees that provide him with guidance,” said Paul Bloxham, chief Australia and New Zealand economist at HSBC Holdings Plc in Sydney and a former Reserve Bank of Australia economist. “So in practice, I don’t think it’s the case that it would be that much different if they actually had a formal board versus what they have at the moment.”

To contact the reporter on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net

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Reserve Bank of New Zealand

Mark Coote/Bloomberg

Pedestrians walk past the Reserve Bank of New Zealand headquarters in Wellington.

Pedestrians walk past the Reserve Bank of New Zealand headquarters in Wellington. Photographer: Mark Coote/Bloomberg

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RBNZ Governor Graeme Wheeler

Mark Coote/Bloomberg

Since his appointment, Graeme Wheeler, governor of the Reserve Bank of New Zealand, has established a governor’s committee including his two deputies and the assistant governor to oversee all policy decisions.

Since his appointment, Graeme Wheeler, governor of the Reserve Bank of New Zealand, has established a governor’s committee including his two deputies and the assistant governor to oversee all policy decisions. Photographer: Mark Coote/Bloomberg