The Labour Party's proposed changes to the monetary policy regime are more modest than they might seem.

Instead of being the sole statutory responsibility of the governor of the Reserve Bank, monetary policy decisions would be made by a committee - as is the practice in almost all comparable central banks.

And Labour would amend the Reserve Bank Act to add a full employment objective to sit alongside the current single mandate of price stability.

But in practice, since 2013 official cash rate decisions have been made by a committee made up of the governor Graeme Wheeler, the two deputy governors, Grant Spencer and Geoff Bascand, and assistant governor/chief economist John McDermott.


Labour would add three "independent experts" to that committee.They would be appointed by the governor "in consultation" with the Minister of Finance.

Minutes of the committee's deliberations would be published within three weeks, including the results of any vote and any dissenting opinions, which ought to be an advance in transparency.

However, outlining the policy in Wellington on Monday, finance spokesman Grant Robertson said: "We will also be asking the non-executive members of the committee to sign a non-disclosure agreement meaning they could not talk publicly about their decision or about future decisions without the permission of the governor."

Presumably, that is to avoid the communication issues arising in the Bank of England model, whose independent members do not have the governor's hand clamped over their mouth.

A Treasury official would also take part in the committee's deliberations, but as a non-voting member.

Economist Michael Reddell, a former senior RBNZ and Treasury official, has long argued for a move away from the single decision-maker model, a change also recommended by the eminent Swedish economist Lars Svensson in an 2001 review, and more recently by the Treasury.

While Bill English was not interested, his successor as Finance Minister, Steven Joyce, has commissioned a review of the issue by former State Services Commissioner Iain Rennie.

Clearly, under Labour's plan, the temple priests of the central bank will still have the upper hand. The risk is groupthink.

Having four internal and three external members would allow the former to caucus and block-vote to outnumber the externals, Reddell said. "In practice staff analysis will always, and typically should, play a big part in decision-making but if we want the model to work and don't want externals feeling disenfranchised from day one it would be better to reverse the balance."

Reddell also sees a yawning democratic deficit in the fact that neither the governor, nor the other six members of the committee, is straightforwardly chosen by the Minister of Finance. The minister can only say yea or nay to a nominee for governor chosen by the Reserve Bank board, and under Labour's plan, not only his or her deputies but the independent members of the monetary policy committee would be selected by the governor.

In this, Robertson appears to be concerned to avoid the perception of a power grab by a potential Finance Minister. Robert Muldoon, it seems, casts a long shadow.

As for legislating a dual mandate, again it is not clear that in practice this would depart much from the status quo.

Robertson stressed the importance of the price stability objective and would seek to continue to define that as consumer price inflation of 1 to 3 per cent.

Defining "full employment" in a policy targets agreement (PTA) with the bank would be more challenging.

Robertson said it was not his intention to seek a numerical target for unemployment or employment rates.

A reference to the concept of NAIRU (the non-accelerating inflation rate of unemployment) would also be problematic. NAIRU is not something that can be observed, only estimated, with considerable uncertainty, and is liable to change over time.

Trying to use it for accountability purposes would be like having a tape measure printed on elastic.

In any case, the state of the labour market is already central to the way that inflation-targeting central banks approach their task.

They form a view of the output gap - the gap between actual and potential rates of economic growth, the latter grounded in fundamental factors like productivity and labour force growth.

If unemployment is on the high side, it is an indicator of slack or spare capacity in the economy and a signal for monetary policy to ease. It is not the only factor, but research the Reserve Bank has done concludes the state of the labour market has proven a more robust indicator of the output gap than others, like what business surveys are saying about capacity utilisation and investment intentions.

So it is doubtful that adding an explicit employment objective to the statute would make more than a marginal difference to the Reserve Bank's monetary policy decisions, though it might make a difference to the prominence give to the labour market when those decisions are written up.

Normally, that is. It is, however, possible for the two objectives to diverge, especially if we were looking down the barrel at a stagflation scenario, when the real economy was heading south but prices were heading north.

What to do then?

Even under the status quo, it would depend on why prices were rising in those circumstances. If it was the result of a transitory supply-side shock, like a spike in oil prices, then the existing PTA effectively tells the bank to look through it, unless it looked like spilling over into generalised and persistent inflation that threatened the medium-term inflation target. That has been the situation since the current regime was introduced 28 years ago.

Because of the long and variable lags between official cash rate changes and their effect on the economy, and especially on a lagging indicator like unemployment, OCR decisions have to be based on forecasts.

And in the case of the labour market, those forecasts are liable to be rendered moot by events like unexpected and sustained strength in net immigration.

The risk in legislating a full employment objective is that it would be seen by the bank as enjoining it to err - in what are always judgment calls - on the side of stimulus.

The danger then is that, as in the 2000s cycle, monetary policy is too loose for too long. In the last cycle, as inflation pressures mounted governor Alan Bollard, having got behind the curve, had to stand on the brake pedal, ultimately pushing the official cash rate to an eye-watering 8.25 per cent, doing nasty things via the exchange rate to the tradables sector, and ankle-tapping the economy into recession before the global financial crisis hit.

And the unemployment rate, which had fallen below 4 per cent, shot back up.

Labour's proposal
• Stick with the 1-3 per cent inflation target
• Add full employment to the Reserve Bank's goals
• Make interest rate decisions by committee - four members from the Reserve Bank and three external appointees
• Publish minutes of the committee's deliberations