Treasury: Making the Reserve Bank focus on price stability could affect expectations and help lower inflation

Finance Minister Nicola Willis doesn't want there to be doubt in anyone's mind about the Reserve Bank's focus on inflation. Photo / Mark Mitchell

The Treasury believes making the Reserve Bank (RBNZ) prioritise price stability could help its inflation fight.

Requiring the RBNZ’s Monetary Policy Committee (MPC) to target inflation, not price stability and “maximum sustainable employment”, is at the top of the Government’s to-do list.

The Government will introduce a bill to Parliament on Tuesday, which it plans to pass under urgency, to ensure the MPC’s dual mandate is gone before its next meeting on February 28.

The Treasury, in a regulatory impact statement, was unconvinced the employment target saw the MPC make decisions it wouldn’t otherwise have made.

But, importantly, it believed the target affected people’s inflation expectations, which could have a “significant impact on inflation outcomes”.

The Treasury explained a single mandate “may influence perceptions of the Reserve Bank’s willingness to take action – which may itself support the achievement and maintenance of price stability”.

“Returning to a single mandate will also mitigate the risk that the MPC’s consideration of MSE [maximum sustainable employment] contributes to higher-than-otherwise inflation.”

Getting into technicalities, the Treasury advised against removing the dual mandate from the Reserve Bank Act.

It recommended the Government issue the MPC a new remit, requiring it to place greater weight on its inflation objective relative to its employment one.

This way, the Government could achieve its goal of making the RBNZ focus on inflation, without changing the law.

The Treasury put “significant weight” on the value of having a stable and enduring legislative regime for the Reserve Bank. It said this gave the public and market confidence in the independence of the institution.

The Treasury said changing the remit, rather than changing the law, would also be the quickest and least resource-intensive way of prioritising price stability.

It noted that having a dual mandate – that either weighted inflation and employment equally or differently – was “international best practice”.

Central banks in the US, Canada and Australia have employment in their mandates, for example.

Nonetheless, Finance Minister Nicola Willis wanted the law changed to make it crystal clear the Government wanted the RBNZ to focus on inflation.

She acknowledged what the Treasury said about the importance of expectations and didn’t want to leave doubt in anyone’s mind about the MPC’s job.

The Treasury acknowledged that changing the law would send the clearest signal that the RBNZ was focused on price stability.

Labour finance spokesperson Grant Robertson, who introduced the dual mandate when in Government, shared the Treasury’s concerns about confusing global financial markets by chopping and changing the law.

He believed the bill shouldn’t be passed under urgency as it deserved scrutiny through the regular parliamentary process.

This would see it go before a select committee, which would hear public submissions on the proposed change.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.