The markets appear sceptical of proposals, write Robert MacCulloch and Brogan Powlesland

On 7 November, 2017, Finance Minister Grant Robertson announced a review of the Reserve Bank Act. The Bank presently has a single mandate – stable prices.

The review proposes shifting to a dual mandate – stable prices and high employment. Bloomberg News ran the story under the headline, "RBNZ Reform Could Potentially Lower Rates, Finance Minister Says".

So what is the likely effect on mortgage interest rates of these changes?

The answer may already lie in the "yield curve".

The yield curve plots rates on borrowed funds with maturity dates from now to many years in the future. Over the time of the formal announcement of the review, between November 6 and 8, the data suggests that rates reacted by going up.


The likely reason is that the market is predicting higher inflation will result from a shift away from the RBNZ's current focus on price stability. More inflation means higher interest rates to compensate lenders for the loss of value of their money.

So what was behind the Finance Minister's claim of lower rates?

Proponents of the dual mandate argue it may better enable the RBNZ to cut rates to provide economic rocket fuel to get people back to work in times of recession.

For sure, a great deal of truly eminent support can be found for this view, including the likes of Benjamin Friedman, a prominent Harvard economist.

But applying rocket fuel requires lots of skill. Too much for too long and inflation can blow up. Yet sustainable growth and job creation relies on low and stable inflation.

Consequently, a credible commitment must be made to raise rates as soon as inflation starts to pick up, once a recession abates.

What are the chances of a revamped RBNZ operating under a dual mandate treading this delicate path successfully?

So far, the markets appear somewhat sceptical, given the upward shift in rates when the review was announced.

Finance Minister Grant Robertson has announced a review of the Reserve Bank Act. Picture / Mark Mitchell.
Finance Minister Grant Robertson has announced a review of the Reserve Bank Act. Picture / Mark Mitchell.

Robertson has defended his review for other reasons.

He has pointed out that the US Federal Reserve operates under a dual mandate. Ironically, there is no shortage of famous US monetary experts, like John Taylor at Stanford, who have been strongly advocating for it to be changed. In favour of what? New Zealand's pioneering single mandate.

Due to there being pros and cons of both regimes, there is not a great deal of consensus as to which one works best.

Ultimately, it is the right of politicians to define the goals that the central bank is tasked with achieving. The reason for our government's choice of a dual mandate is probably to create a perception amongst voters that it is weighting the well-being of the jobless more than previously.

The reality could turn out differently, however, depending how well the new mandate is implemented. Of paramount concern is whether it will be executed by the RBNZ independently from political pressures.

Oddly, right at this very time, just when our central bank is under intense scrutiny from our politicians, the Board has left it operating under a transitional arrangement, without a nominated full-term successor to the former governor Graeme Wheeler.

Wheeler announced that he would stand down last February and did so in September 2017. His replacement won't be announced until March 2018.

By then the first phase of the new government's review will be done. Why was a vacuum created over this period when national debate over the Reserve Bank's future would be at its peak? There has been little transparency regards the process.

In his November 2017 press conference, Robertson was quoted as saying he had sought an assurance from the chair of the RBNZ board "that any candidates he was interviewing would be ones who would be able to implement a change to policy along the lines we're going".

However, applications for the new governor closed long before the election.

Maybe someone like Friedman did not apply back then, since he did not support the RBNZ's single mandate. On the other hand if Taylor applied, who is one of its biggest fans, will he now get a rejection letter?

Perhaps the successful candidate is going to be the one with the least principles, happy to implement any mandate!