New Zealand government may fast-track RBNZ reforms ahead of law changes

WELLINGTON (Reuters) - New Zealand’s Labour-led government could make changes to the central bank as early as March by appointing a reforming governor and making a prompt shift to policy settings, a former bank official and economists say.

FILE PHOTO: A New Zealand Dollar note is seen in this picture illustration June 2, 2017. REUTERS/Thomas White/Illustration/File Photo

An opening at the top of the Reserve Bank of New Zealand (RBNZ) gives the fledgling government the opportunity to make full employment a focus alongside inflation, pre-empting a more lengthy legislative process.

Much could be accomplished by a quick rejig of the Policy Targets Agreement (PTA), which sets out the conditions for achieving the bank’s monetary policy target, said former RBNZ official Michael Reddell.

“If you get a new governor who is broadly sympathetic to the direction you want to go in, you can write quite a lot into the policy target agreement,” Reddell said. “To my mind that’s going to be one of the tests as to how serious they are, as to whether they really want to change the bank.”

A source familiar with the matter said the government will stick to the current policy target agreement at least until a new RBNZ governor is appointed.

The new government has said it will review the Reserve Bank Act to include employment to its mandate which currently focuses solely on inflation.

The government could also make the exchange rate a higher priority in the PTA to satisfy the government’s junior coalition partner, New Zealand First, which favours lowering the local currency to boost exports.

A greater focus on employment would mark a shift for the first central bank to introduce an official inflation target in 1989.

The proposed central bank changes are already working to depress the New Zealand dollar, said Wellington-based dealer at OM Financial, Stuart Ive, with the kiwi down more than 5 percent since before the election.

“There’s concern from financial markets around reform of the RBNZ and they will be very keen to see what those details actually are,” said Ive.


Reforming monetary policy will be an early test for a government with ambitious plans to radically reduce child poverty, and make housing more affordable for locals by banning foreign speculators and cutting immigration.

Job creation remains a hot-button political issue even as the unemployment rate drops to nine-year lows.

Finance Minister Grant Robertson is due to appoint a new governor in March, upon recommendation of the Reserve Bank Board, and both will have to agree on any changes to the PTA. The application process started before the election.

Robertson did not respond to a request for comment.

Past reforms of the PTA have included changes to inflation bands - the initial 0-2 percent target was widened in 1996 and then lifted in 2002 to its current 1-3 percent.

New Zealand also made explicit that the Bank was required to avoid unnecessary instability in output, interest rates and the exchange rate when pursuing price stability in 1999.

Paul Dales, chief economist Australia and New Zealand at Capital Economics, said it should be simple for the Labour-led government to instruct the RBNZ to focus more on employment in the PTA, before changing the Act.

“If you’re just going to say you should think about employment more, then it should be fairly quick,” he said.

He said the additional mention of employment would make some difference right away.

“If there’s a change, it has to have some influence. It would be more about keeping rates on hold longer or making (markets) more confident about the idea that they could keep rates on hold longer.”


Analysts still believe the biggest influence on the central bank’s direction will be its new governor.

Robertson can accept or reject the board’s recommendation, or, in a much bolder move, could even restart the process and ask for fresh applications.

The government could avoid rocking the boat by opting for someone like deputy governor Geoff Bascand, if his name is put forward by the board, analysts said.

Bascand, who told local media he has applied for the job, declined to comment.

Another possible candidate being discussed is Adrian Orr, the chief executive of the highly regarded New Zealand Superannuation Fund and a former deputy governor at the RBNZ.

Orr had a reputation as a straight talker and for shaking things up at both institutions, according to former RBNZ official Reddell.

Orr declined to comment.

While changes to the central bank mandate could lead to looser monetary policy, any shift would also be symbolic after almost a decade of rule by the centre-right National party.

“The Reserve Bank Act has become a symbol for many on the left of neo-liberalism and therefore for the government to make some changes to the Reserve Bank Act and changes to the way the Reserve Bank works is politically important,” said Bryce Edwards, political analyst at Critical Politics in Wellington.

Reporting by Ana Nicolaci da Costa and Charlotte Greenfield; Additional reporting and writing by Jonathan Barrett in WELLINGTON; Editing by Lincoln Feast