By BRIAN FALLOW ecomonics editor
We can trust Don Brash with sole power to raise and lower interest rates, but not necessarily the next guy.
That is the conclusion of the Government-commissioned independent review of monetary policy by Swedish economist Lars Svensson.
He has recommended that when Dr Brash's third term expires in 2 1/2 years, responsibility for monetary policy be given to a committee of five senior Reserve Bank officials.
The present system works well, Professor Svensson says, but that is down to Dr Brash.
Future governors might be less willing to encourage open debate within the bank or less able to take the heat that goes with the territory.
Professor Svensson says the Reserve Bank's performance generally compares well with other central banks with a flexible inflation targeting regime.
An exception, acknowledged by Dr Brash, was the period from mid-1997 to March 1999 when the bank was using the monetary conditions index to implement policy and did not ease fast enough after the Asian crisis and a bad drought.
Professor Svensson recommends that the bank continue to interpret its 0 to 3 per cent inflation target as a mandate to aim at a target of 1.5 per cent over the medium term - two or three years ahead - accepting some variability in the inflation rate in the short term in the cause of less variability in economic growth, interest rates and the exchange rate.
He recommends that when the policy targets agreement is next renegotiated, a 1.5 per cent medium-term "point target" for inflation replace the 0 to 3 per cent range.
It would be a better anchor for inflation expectations in the context of wage negotiations, for example.
Professor Svensson rejects calls for a higher target, such as the 2.5 per cent Deutsche Bank argued for.
He endorses the bank's output gap approach to setting policy as orthodox, if not inevitable.
On the role of Parliament's finance and expenditure committee in keeping the governor accountable, Professor Svensson makes the general observation:
"Unfortunately in many countries it is not unusual for such committees to use hearings with central bank officials for scoring political points rather than for more penetrating scrutiny."
He suggests appointing outside experts to aid the committee.
Dr Brash was non-committal yesterday on his opinion of Professor Svensson's recommendations, although he said "no one should rush to judgment" on the issue of governance and decision-making processes.
The bank will respond formally to the Svensson report by the end of this month.
Finance Minister Michael Cullen said that although changes to the policy targets agreement could be decided by the finance minister and the governor, altering the governance structure would require changes to the Reserve Bank Act.
One of the strengths of the present system was its broad political support.
"Any changes ... are not just for the Government to decide."
The Government's response to the Svensson report will be announced by the end of May.
AdvertisementAdvertise with NZME.
Latest from Business
Steven Joyce: Kids need to know they have the power to succeed
OPINION: Our bureaucratic, top-down education system is visibly failing us.