Monetary review no threat to Reserve Bank

By VERNON SMALL deputy political editor

The Government has launched a probe into monetary policy, but has ruled out a rethink of the Reserve Bank's independence or its primary focus on price stability.

Announcing the review, which was flagged in the pre-election policies of both Labour and the Alliance, Finance Minister Michael Cullen said the Government was not seeking to reinvent the wheel or make fundamental changes to the bank.

The aim was to look at ways to enhance its ability to implement policy with minimal disruption to the economy and the least volatility in interest rates and the exchange rate.

The review would also look at the coordination of monetary policy with other elements of the economic policy framework, and at governance issues.

The latter would include an analysis of whether the Governor of the Reserve Bank should be the sole decision-maker, or whether a panel should be used.

The Governor, Dr Don Brash, also signalled that there was some "awkwardness" because he was both the chief executive and the chairman of the board that reviewed his performance.

Market analysts expected little change to the way monetary policy was implemented as a result of the review, although a change to the governance of the bank was likely.

Alliance leader and Deputy Prime Minister Jim Anderton, who has criticised the bank for raising interest rates, welcomed the review, saying Dr Cullen had accepted all of the Alliance's "reasonably long list" of changes to the terms of reference.

"We were given all the accommodations we could have reasonably expected."

Mr Anderton said the Alliance saw change as incremental and the review would help to put on the table questions of whether current monetary policy was working well.

He said economic, monetary and fiscal policies had to work together.

"If you get all three harmonised so they move in the same direction, that is what you want. What is revolutionary about that?"

Opposition parties claimed the probe was a "Clayton's review" and a sop to the Alliance, which has a radically different view of monetary policy from the Labour Party.

The Alliance wants to replace the Reserve Bank Act, widen the 0 to 3 per cent inflation target to 1 to 4 per cent and manage at an appropriate level the exchange rate, money supply growth and interest rates.

It also wants to use a broader range of instruments than the current official cash interest rate, including reserve ratios and open market operations by the bank.

Dr Cullen said an overseas expert would be appointed soon to lead the review. It would cost between $200,000 and $500,000, depending on the fee paid to the new head.

The minister expected a report to be completed by early next year.

Dr Brash said he accepted that the inquiry was inevitably a review of his performance. He was prepared to look at tools such as market intervention in the level of the dollar, although international experience suggested this was inappropriate.

Dr Cullen said he would take a lot of convincing to back currency intervention.