Adrian Orr: Employment target not hindering efforts to curb inflation

Reserve Bank Governor Adrian Orr at a Monetary Policy Statement press conference on May 25. Photo / Mark Mitchell

Reserve Bank of New Zealand (RBNZ) governor Adrian Orr says the central bank would be taking the same course of action as it is now, if it was only tasked with targeting inflation.

The Labour-led Government in 2018 started requiring the RBNZ to target both inflation and "maximum sustainable employment" when it sets monetary policy.

The National Party argues the dual mandate has distracted the RBNZ, and seen it take its eye off the inflation ball.

Leader Christopher Luxon, in February, said the National Party would remove the employment target from the Monetary Policy Committee's mandate.

"There's been too much mission creep at the Bank, which is to be expected with the Government continually meddling with its objectives and trying to pass responsibility for its own failures onto the Bank," Luxon said at the time.

"Giving the Bank multiple, potentially conflicting objectives, makes it harder for the Bank to do its core job of controlling inflation, and harder for the Government and the public to hold the Bank to account."

Luxon's comments followed former RBNZ chairman Arthur Grimes accusing the RBNZ of loosening monetary policy too much in response to Covid-19, thanks to the dual mandate.

The Herald on Wednesday asked Orr how different the RBNZ's official cash rate (OCR) outlook would be if it was only tasked with keeping inflation between 1 and 3 per cent.

He said it wouldn't make a difference.

"Employment is well above maximum sustainable employment; inflation is well above the target range," Orr said.

"So, it's the same. We would have to do the same thing, i.e. tighten monetary policy to a significant degree."

RBNZ chief economist Paul Conway backed Orr up, saying, "There is no conflict there at all [between the inflation and employment targets]."

The RBNZ on Wednesday hiked the OCR by 50 points to 2 per cent, and signalled its intentions to lift the rate aggressively to around 3.9 per cent by mid-2023.

It used strong language, saying it was "resolute in its commitment" to reducing annual inflation, which sat at 6.9 per cent in the March quarter.

It also recognised more people will lose their jobs, which would loosen the labour market and reduce the employment rate from 69 per cent to "levels more consistent with maximum sustainable employment".

Neither the RBNZ, nor the Government via legislation, have put a number on what "maximum sustainable employment" is.

The RBNZ will on Wednesday start consulting with the public on how its monetary policy remit does or doesn't need to change. It's required by legislation to review its remit every five years.

Orr, in February, said the review would "be an opportunity to consider how the RBNZ balances our inflation and employment objectives, and what weight, if any, should be put on secondary considerations such as distributional impacts and housing".

The Government in February 2021 (as house prices were soaring) started requiring the RBNZ to "assess" the effects its monetary policy decisions have on the Government's policy to support more sustainable house prices.

National is pledging to remove this requirement too.