Bernard Hickey: Markets in doubt as truce called off

New Reserve Bank Governor Graeme Wheeler appears more orthodox than his predecessor, Alan Bollard. Photo / Mark Mitchell

Kiwi businesses, borrowers and savers should prepare for unprecedented uncertainty around monetary policy in the years ahead.

For more than 20 years, monetary policy has been off the political agenda and set in stone by the 1989 Reserve Bank Act. That truce ended this week at a parliamentary select committee hearing.

An emboldened group of Opposition leaders - including Labour finance spokesman David Parker, Green co-leader Russel Norman and NZ First leader Winston Peters - challenged Reserve Bank governor Graeme Wheeler's defence of the Reserve Bank Act.

The parties have been working together recently to call for an inquiry into the slump in manufacturing jobs, and for monetary policy changes to lower the NZ dollar. The Greens have even called on the Reserve Bank to print money to buy Government earthquake bonds to help finance the Christchurch rebuild.

This was Wheeler's first appearance before the Finance and Expenditure Select Committee, and it didn't go well. Wheeler had primed Opposition members with his October 26 speech, setting out his stance in favour of pure inflation targeting, a hands-off approach to the currency and a staunch opposition to money printing.

Wheeler's approach is clearly more orthodox than that of his predecessor, Alan Bollard, and it sets him up for a clash with any new Labour/Green/NZ First coalition government, if elected in 2014.

If Wheeler is true to his word, as outlined in his first appearance before the committee, he will not be able to "fudge" a new Policy Targets Agreement.

Attempts to change the way the Reserve Bank runs would require a reworking of the Reserve Bank Act to include multiple targets, the ability to intervene in the currency and bond markets, and potentially a change in the way decisions are made.

The power to make these decisions is vested in the governor rather than a committee, as is the case in most other central banks.

This changeover could get ugly. Market expectations of interest rates closer to the 2014 election would have to take into account the risk of a clash between the governor and a new government. Would the governor be forced to resign? Would a new government have to wait for Wheeler's five-year term to expire in 2017? Would interest rates and currency be lower without Wheeler in place?

This is new territory for business decision-makers, savers and borrowers alike. Until now it has been relatively easy to set expectations, as long as viewers understand the framework and know what the Reserve Bank's expectations are for the economy. All of that goes out the window in a politicised environment where the future governor and the way the bank operates is uncertain.

The breakdown in political consensus on monetary policy has burst into the open with the appointment of a hard-line governor wedded to the Reserve Bank Act.

bernard.hickey@interest.co.nz