Liam Dann: Market relieved as Govt sets out Reserve Bank plan

Labour's finance spokesman Grant Robertson defending his figures after Finance Minister Steven Joyce claimed Labour has a shortfall of $11 billion on it's books, Parliament, Wellington. 4 September 20

Details of the Government's Reserve Bank Act review provoked a rise in the dollar suggesting global markets were untroubled by fears that it might weaken monetary policy.

Finance Minister Grant Robertson unveiled a two-phase review of the Reserve Bank Act that will initially look at including employment explicitly in the policy targets, as well as the traditional inflation measures.

The first phase will also include a move to formalise a committee-based decision-making process - potentially including external experts.

But Robertson did explicitly rule out targeting the currency and a specific nominal target for unemployment.

"If anything its probably a relief to financial markets," said NZIER senior economist Christina Leung. "It's actually not that much of a change from what we have currently."

The Reserve Bank has already moved informally to committee based decision making on interest rates and already considers factors economic output and employment data in its thinking when it sets monetary policy.

"So it's more just tweaking around the edges," Leung said.

That does beg the question: why bother?

"The fact that they are putting a more explicit reference to maximising employment might be in anticipation of more expansionary fiscal policy down the track," Leung said.

In other words, Robertson may be looking to head Reserve Bank reaction to inflation pressure off at the pass as the Government moves to raise wages.

"This Government is determined to focus on creating more jobs and higher wages for New Zealanders," he said. "It is in our DNA to ensure Kiwis have the best possible quality of life through the best employment opportunities. Every part of the economic apparatus needs to play its part in this, including monetary policy."

But he was also careful to emphasise a commitment to the 1 to 3 per cent inflation band.

"Our monetary policy framework with it's focus around price stability and inflation control has served New Zealand well in general," he said. "The operational independence of the Reserve Bank remains paramount and will be protected."

Robertson re-signed the existing policy agreement with acting Reserve Bank Governor Grant Spencer and said the recruitment process for Graeme Wheeler's long-term replacement was now well advanced.

Treasury will lead the phase one review with a view to getting new policy in place by March in time for the appointment of the new governor.

Treasury and the Reserve Bank will jointly work on a list of areas to be included in a broader "phase two" review to be undertaken in 2018.

While there was no further detail about this it seems likely that it will include other aspects of the Reserve Bank's brief, including financial stability and macro-prudential policy.

It was this part of the Reserve Bank's mandate that allowed it to introduce loan-to-value ratio restrictions in the housing market.

Given the limited scope of the proposed review Robertson's decision about who will lead the Reserve Bank until 2023 may end up having a greater bearing on monetary policy and interest rates.

On Thursday Spencer delivers his first full monetary policy statement as governor. The official cash rate is almost certain to remain on hold at 1.75 per cent.

Market focus is on the likelihood of hikes being brought forward. Reserve Bank models currently suggest no moves until the end of 2019.

The New Zealand dollar was trading at US69.32 at 5pm yesterday from US69.24c at 8am.