The ministry has had a strained relationship with some in the education sector and is keen to turn that around.
Hughes announced Holsted's appointment and said his former job was "a very important role for New Zealand and the public service".
"Ms Holsted has led ERO very effectively since 2014 and, in that role, has made a significant contribution to the leadership of the education sector.
"She is very committed to improving educational outcomes for New Zealand's children and young people, especially for Maori and Pacific learners.
"Ms Holsted has the leadership skills, experience and personal integrity to gain the trust and respect of the education sector and work with them to deliver better educational outcomes."
Katrina Casey will remain as acting secretary until Holsted starts her role on December 5. She has been appointed for five years.
The process to find a new chief review officer for ERO has begun.
Holsted started her career as a primary school teacher in Auckland, and later became an advocate and researcher for the Public Service Association (PSA). Between 2007 and 2014 she held four senior management roles at the Ministry of Social Development.
She also spent six years as a deputy commissioner at the State Services Commission.
Parata will not contest next year's election. Prime Minister John Key is yet to reveal if he will appoint someone else as Education Minister before that time.
