Finance Minister Grant Robertson looks on as Reserve Bank Governor Adrian Orr speaks to the media. Photo / Getty Images
OPINION:
It is a bit much for Shadow Treasurer Andrew Bayly to raise the spectre of Robert Muldoon over the Government's planned overhaul of the Reserve Bank's prudential role.
A return to the bad old days before 1989's Reserve Bank Act — and they were bad — is not at hand.
Bayly's warning is premature, but not altogether baseless.
There are grounds to be wary of how far Finance Minister Grant Robertson wants to go in giving himself and his successors a more proactive and prescriptive role in what has long been the central bank's exclusive domain: the regulation of banks and other deposit-taking institutions.
A Cabinet paper released last week sketches the tricky balance to be struck here.
A greater role for the Minister of Finance would reduce a democratic deficit in the status quo, and enable better management of "broader distributional trade-offs and societal preferences" — in other words, who are the winners and who are the losers in any policy change.
It also "reduces the risk of ad hoc changes to the legislative framework arising from political frustration". An example of that, perhaps, was February's insertion into the Reserve Bank's monetary policy remit of entirely incongruous language about "dampening investor demand for existing housing stock".
On the other hand, a greater role for the minister would risk short-termism and a bias towards inaction.
It could reduce confidence in the Reserve Bank and its ability to achieve its statutory financial stability mandate, blur accountability and reduce the role of technical expertise.
Under the new prudential framework, "standards" set by the Reserve Bank, specifically its board, will be the primary tool for regulating deposit takers.
The prudential framework will specify the scope of matters on which the Reserve Bank will be able to set standards, but enable the minister to add additional matters to which standards can relate via regulations.
The minster will have to consult the bank but it will no longer be a matter of just saying yes or no to recommendations from the bank. The Treasury argued for this on democratic legitimacy grounds.
Quite how much this shifts the boundary of power between the elected government of the day and the technocrats over the road at the central bank remains to be seen, however.
It will depend on the provisions of a Deposit Takers Act which has yet to be drafted, let alone enacted, and on regulations authorised by it which are yet to be made.
At this stage it looks as if the Cabinet prefers the view of the Reserve Bank (broad) to that of the Treasury (narrow) on the scope of the bank's standard setting power when it comes to the instruments it can use.
But maybe not. It is hard to imagine Robertson would give up having any say on whether debt-to-income curbs or, potentially, restrictions on interest-only loans are added to the Reserve Bank's toolkit.
On the power to discriminate between different classes of borrower that a tool would apply to (for example between owner-occupiers, first home buyers and investors) it is also not yet clear how much latitude the Reserve Bank will have. The Cabinet paper suggests the bank's view has prevailed, but that would be at odds with Robertson's willingness to change the bank's riding instructions back in February.
The Reserve Bank's operational autonomy — its right to decide whether, when or how vigorously to use the contents of its permitted toolbox — would remain protected, however.
As the regulatory impact statement puts it, "operational independence is crucial in the deployment of macro-prudential tools as their implementation can often be unpopular (for example constraining credit at the upwards stage of the business and credit cycle)".
Robertson's Cabinet paper also tells us the planned Deposit Takers Act will lay down decision-making principles, which include taking account of longer-term risks to financial stability such as climate change.
That brings us to another key source of uncertainty: a big blank cheque the Government wants Parliament to write it called the "financial policy remit".
This remit will spell out matters of wider government policy which the Reserve Bank board will have to "have regard to" in setting lending standards, when setting its strategic objectives in relation to financial stability and when making significant policy decisions about how to achieve those objectives.
So it sounds important.
The remit is provided for in legislation, the RBNZ Bill, already before Parliament's finance and expenditure select committee.
But at this stage it has yet to be populated with any content. It is expected that the remit will be developed after the RBNZ Bill is enacted, expected to be next year, in consultation with the Reserve Bank.
An update from the Treasury on its Reserve Bank Act review back in December 2019 said the remit would act as a mechanism for dialogue between the Government and Reserve Bank, allowing the minister to express expectations about the significant policy powers that have been delegated to the bank.
It will relate to the Reserve Bank's objectives, rather than its operations. It would set out matters the bank must consider, but not compel or forbid it to do anything, "thereby protecting the Reserve Bank's operational independence".
The remit is likely to expect that the prudential framework is broadly aligned with international standards, but also that "the bank has regard to guidance issued under the Climate Change Response (Zero Carbon) Act". The equivalent remit governing the deliberations of the bank's monetary policy committee (MPC) is a very powerful document.
Among other things, it specifies how inflation is defined for the purposes of the bank's price stability objective. The inflation target is defined in terms of Statistics NZ's all groups consumers price index.
If instead it was the all groups plus interest series that Statistics NZ also produces — on the grounds that mortgage interest costs are a large part of the cost of living for a lot of households — the current annual inflation rate would be just 0.2 per cent, not 1.5 per cent. And if it included some measure of house price inflation, it would be a lot higher than 1.5 per cent. So such technicalities matter.
The monetary policy remit also carries forward caveats from its predecessor, the policy targets agreement, which applied when the governor was the sole decision-maker on monetary policy.
They include an injunction that, in pursuing its operational objectives, the MPC shall "seek to avoid unnecessary instability in output, interest rates and the exchange rate" — in other words, try not to be too heavy-footed when hitting the accelerator or the brakes — and "discount events that have only transitory effects on inflation", which is especially relevant right now.
These caveats represent high-level guidance of enduring validity.
By contrast, the additional provision the Government added in February is an order of magnitude more micro and short-term. It requires the monetary policy committee to assess the impact of its decisions on the Government's policy of supporting "more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first home buyers".
Such an injunction really does not belong in the MPC's riding instructions. It is hard to know what it is supposed to make of it, when there is no such thing as precision monetary policy. It wields a chainsaw, not a scalpel.
But it is sort of thing we might expect to see in the financial stability remit.
Economists expect the recovery continued during the first quarter of the year.