COMMENT

When the Reserve Bank lowers its official cash rate the good ship New Zealand is usually heading into a storm that can be seen by everyone on board. Not this time.

Finance markets did not expect a cut so soon and the Herald's economic commentators Liam Dann and Brian Fallow are not alone in wondering what the bank is so worried about.

Certainly there are clouds on the global horizon, especially the big orange one over the United States which has turned dark on Iran and China again lately. But it blows hot and cold. Its menace is its unpredictability which provides no basis for others to alter their course.

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The fact that some other central banks have turned gloomy has not always caused ours to change course. Under the steady hand of successive governors the ship has weathered periods of global turbulence better than most economies for quite some time.

Timing is essential to stability, it is important not to drop the ballast too soon.

So when we get a decision like this with nothing rocking the boat it is natural to look at the helmsman with concern. And when we do we notice he is no longer alone at the wheel. A committee made the decision.

Last Wednesday's rate cut was the first decision to be made by a committee set up by this Government to remove responsibility for monetary management from the Governor alone.

The Monetary Policy Committee headed by Governor Adrian Orr comprises four bank officials and three outside economists, Professors Bob Buckle of Victoria University and Caroline Saunders of Lincoln, and Peter Harris, a formidable opponent of liberalisation in the 1980s when he was the Council of Trade Unions' economist.

Ever since Labour came to power business has been assured by the bank that a committee would not make much difference to the stability of the currency and the economy. The Governor has always had an internal committee to help him decide what to do. What could change?

Well, quite a lot, I feared. To have sole final responsibility for an important decision is immensely sobering. It is not so much that you will be personally accountable but that you are conscious so much is resting on your ability to get it right.

Personal predilections go out the window, objective clarity comes in. It lets you see advice in a light not always shared by those giving you the advice. Cold, hard realism dispels sentimental inclinations, philosophical bias and political agendas.

A committee is different. A committee disperses responsibility. The inner voice of realism is unlikely to be the most articulate voice at the table. It may be intuitive, hard to explain. It may argue for a decision that is unfashionable and less exciting than other options, just boringly sensible.

Even the chair of the committee can be persuaded to vote against that inner voice called better judgment. The chair can feel absolved, even virtuous, for respecting a consensus.

That is how committees so often make inconsistent, confusing and downright wrong decisions. It is why business in the private sector puts ultimate executive decisions in the hands of one person who is held solely accountable for the consequences.

But the Labour Party believes in "collaborative" decisions. It also believes monetary policy can be used to maintain "maximum sustainable employment" as well as low inflation.

With its decision last week the Reserve Bank published a record of the committee meeting. The record makes it clear the main reason the committee decided to raise the official cash rate immediately was that inflation, currently 1.5 per cent is slightly below the middle of the target range, 2 per cent.

It believed this gap allows it boost employment though it also noted "employment is near its maximum sustainable level". Confused? This is a committee.

To justify its rate cut it has had to adopt an unduly pessimistic outlook for employment based on lower immigration (not happening) and less household spending with house values no longer rising.

House price stability is an achievement this committee seems happy to reverse. Mortgage rates have dropped in response to its decision.

Any drop in activity over the past year does not appear to have reduced the revenue the Government will have for its Budget next week. There is likely to be additional spending as well as a solid surplus. The committee in fact expects a fiscal boost to make up for the reduction in household spending, so why cut interest rates?

It is particularly worrying that this is the committee's first decision. The interests of business confidence should have put the committee at pains to demonstrate monetary policy stability would not be upset.

Instead it has demonstrated the opposite, that the ship is under collaborative captaincy now and confusion reigns.