Former civil service chief to review New Zealand’s interest rate system
New Zealand’s Treasury has appointed a former senior civil servant to review how interest rates are set by the governor of the Reserve Bank, who is considered to have powers greater than almost any other central bank chief.
Iain Rennie, the former State Services Commissioner, will examine the process for setting the official cash rate (OCR), which influences the cost of mortgages, returns on savings and government borrowing costs.
While a radical shake-up in how the benchmark rate is set is unlikely, the review will steer debate in the run-up to the appointment of a new central bank governor to succeed Graeme Wheeler, who aims to stand down shortly after general elections on 23 September.
“Really no one much is now left defending the extraordinary concentration of discretionary power in monetary policy and financial regulation that the Reserve Bank Act puts in the hands of one unelected official,” Michael Reddell, a former economist at the bank, told a Victoria University policy forum. “In almost no advanced economy is there anything that comes close.”
Unusually among advanced economies, in New Zealand the power to set rates resides solely with the central bank governor – though Wheeler voluntarily convenes an informal committee of senior staff to contribute to the decision-making process. Critics say New Zealand’s arrangements give unrivalled power to an unelected official and foster concerns about the rigour of decision-making.
Rennie’s review will fuel debate about whether external economists should participate, but to date the National Party has resisted change; and this review has been set up by the Treasury, not by ministers. In 2012 Bill English, then minister of finance and now prime minister, was advised by the Treasury to consider creating a committee system – but action has since been slow. Party officials have indicated that Rennie’s review – likely to report after the Budget in May – will look at whether there is a need to codify Wheeler’s informal committee in law.
Meanwhile, Labour’s finance spokesman Grant Robertson has proposed stripping the governor of his unilateral power by establishing a monetary policy committee (MPC) with some external members whose minutes are published. Labour also wants to broaden the bank’s sole focus on inflation targeting by adding to its core aims a commitment to full employment.
Reddell, who spent 25 years on the Reserve Bank’s OCR advisory group, welcomed Labour’s proposals, but warned against giving the governor control over MPC membership. He told the Victoria University forum: “There is a yawning democratic deficit – one might even say ‘democratic chasm’ – there. These are really powerful positions, with the ability to substantially influence the short- to medium-term path of the New Zealand economy.”
Note: this article has been edited to make clear that the review has been commissioned by the Treasury, not by ministers
Read our 2016 interview with Iain Rennie here
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