Reserve Bank panel needed says Westpac

By BRIAN FALLOW

The present governance system with another level of accountability and communication might raise "burden of proof" for policy decisions.

Body1: Westpac wants to see an outside panel of experts appointed to increase the Reserve Bank's accountability.

It suggests the Reserve Bank board appoint the panel, which would be briefed by bank staffers soon after a monetary policy statement and who would then write up their views on the wisdom of the monetary policy decision.

Such a structure, Westpac says, would leave the present governance system in place, albeit with one more level of accountability and communication, and might raise the "burden of proof" for policy decisions.

The proposal is contained in Westpac's submission to the Government-commissioned independent review of the operation of monetary policy.

It supports the status quo where the Governor alone has the final decision on whether to adjust the official cash rate.

"The major advantage is that a single individual is held accountable with no board to hide behind."

Besides, Westpac says, it is not clear that making decisions by the vote of a monetary policy committee or board would change the outcomes.

Although many other central banks have such a system, the Governor or chairman of the board generally comes out on the winning side of any vote. One reason is that they have the information and analytical resources of the bank behind them.

If there were a voting board, should it be made up of experts as in England or non-expert businesspeople as in Australia?

The former would probably want their own research teams, as in the Bank of England case; the latter would involve real and significant conflicts of interest.

Westpac endorses the present framework of monetary policy. That includes the single goal of price stability, laid down by the Reserve Bank Act, and the requirement to operate policy so as to avoid unnecessary instability in output, interest rates and the exchange rate, enshrined in the policy targets agreement.

The Reserve Bank has moved towards the mainstream of central banks in recent years:

In adopting the official cash rate as its instrument for implementing monetary policy.

In the widening of its inflation target band to 0 to 3 per cent.

In focusing on a more medium-term (one-to-two-year) horizon in its attempt to achieve price stability.

"This implies they are paying attention to the persistent demand pressures that may be impacting on inflation - those which are most influenced by interest rates.

"This is in contrast to concentrating primarily on the near-term price pressures that may arise, for example from exchange rate developments."

But if the Westpac economists are happy with the way the formulation of monetary policy has evolved, they are less complimentary about its implementation.

For too long the bank relied on jawboning - "public grunts and groans whenever interest rates drifted from the desired level."

That was replaced by the ill-fated monetary conditions index, whose era coincided with the Asian crisis and its aftermath. Using the MCI as a policy instrument was like using a ruler as a hammer, Westpac says.

It was not until early last year that the bank adopted the conventional approach of operating through an official interest rate.

But these implementation issues only impacted on the real economy at the margin, Westpac says. "The New Zealand economy was always going to wear the Asian financial crisis and the droughts of 1997 and 1998 heavily. Nevertheless monetary policy could have played a larger buffer role than it did in the late 1990s."

The fact that it did not, mostly because of its implementation policies, Westpac says,

has cost the bank in terms of investor and public credibility.