The Coalition Government’s plan to reform and modernise the Reserve Bank Act experienced an important milestone today, Finance Minister Grant Robertson says.
Grant Robertson and Reserve Bank Governor Adrian Orr today signed the first ‘remit’ setting out the Reserve Bank of New Zealand’s new dual employment and price stability objectives. They also signed the ‘charter’ that will govern the decision-making of the Bank’s new Monetary Policy Committee (MPC).
“When we came into office we immediately started work under the Coalition Agreement between Labour and New Zealand First to review and reform the Reserve Bank Act to reflect the significant changes to our economy and monetary policy practices since the Act was enacted nearly 30 years ago,” Grant Robertson said.
The new remit, charter and the MPC deliver on Phase 1 of the review of the Reserve Bank Act. The remit will normally be issued by the Minister of Finance to the MPC, a new body to formulate monetary policy through decisions like the level of the Official Cash Rate. The charter will normally be agreed between the Minister of Finance and the MPC. As part of the transition to the new monetary policy framework, the first remit and charter are being agreed between the Minister and Governor.
The remit replaces the Policy Targets Agreement (PTA) between the Minister of Finance and Governor. The charter sets the transparency requirements and decision-making procedures for the MPC. Both come into force from 1 April, with the existing PTA covering the Bank’s monetary policy decision-making until then.
Under the remit signed today, the Reserve Bank’s operational objectives for monetary policy are to:
- Keep inflation between 1 and 3 percent over the medium term, with a focus on keeping inflation near the 2 percent mid-point; and
- Support maximum sustainable employment.
“This dual mandate is similar to those seen in countries including the US, Australia and Norway, and highlights the importance of monetary policy as a tool to support the real, productive, economy,” Grant Robertson said.
Reserve Bank Governor Adrian Orr says the remit and charter form a significant part of the new monetary policy framework that takes effect from 1 April.
“The remit is similar to the existing Policy Targets Agreement and recognises the role monetary policy plays in promoting the wellbeing of New Zealanders, by making sure inflation remains low and stable, and supporting maximum sustainable employment,” Adrian Orr said.
“The MPC Charter also provides for a move to greater transparency, and embracing diverse views. It sets some ground rules for the Committee, ensuring that the decision-making process is effective and transparent, and making it easier to hold the Committee to account for their decisions,” Mr Orr said.
Under legislation passed in December, the MPC will consist of between five and seven members, with the majority being Reserve Bank internal staff and a minority of external members. The first committee will consist of seven members (four internal, three external), with the Governor as chair. The members of the MPC are to be announced in due course.
“There has been greater recognition in recent decades of the benefits of committee decision-making structures and the Act has now been modernised to reflect this. Combined with the dual price stability and employment mandates, these reforms will ensure monetary policy better supports the New Zealand economy as we head towards the middle part of the 21st Century,” Grant Robertson said.
