However, with the inflation rate spiking to 7.3% in 2022, remaining stubbornly high for the following two years, and creeping back outside the Reserve Bank’s target range late last year, one would have to question why Labour would put anything – real or perceived – in the way of the Reserve Bank remaining laser-focused on keeping inflation at bay.
With the rate outside of the 1-3% target range for 16 of the past 21 quarters, the cost of living (relative to incomes) remains front of mind for New Zealanders.
If Labour put people’s economic wellbeing ahead of virtue signalling, it would leave the MPC to get on with its job.
Since taking up the role in December, Reserve Bank Governor Anna Breman has been at pains to assure the market the committee is focused on maintaining low and stable inflation.
The messaging is important, because if people start to doubt the committee’s commitment to keeping inflation in check, particularly at a time when oil prices, council rates and electricity costs are sky high, businesses could start hiking prices and workers could start demanding higher wages pre-emptively.
If inflation expectations get out of hand, actual inflation could get out of hand. The situation is partially a confidence game.
It would be going too far to say a dual mandate would dent confidence in the Reserve Bank. But it would make its job harder.
It would add another layer of uncertainty to the uncertain economic and geopolitical environment we are in.
The OECD has the same view, which it shared in a report on New Zealand earlier this year.
“International experience shows that mandate design works primarily through its effects on inflation expectations, rather than through the wording of the mandate,” it said.
“The shift back to a single mandate helps anchor expectations by removing any perception that the RBNZ might refrain from taking necessary policy action out of concern about employment. It also reduces potential policy conflicts during negative supply shocks.
“However, if too frequent, changes to the framework can weaken predictability. They can also raise the risk of policy mistakes …”
The OECD concluded that given the number and pace of changes in recent years, keeping the single mandate would “support predictability, credibility and confidence in the monetary policy regime”.
Those with a dovish view believe the MPC prematurely started removing stimulus from the economy by lifting the OCR last month.
They argue the economy was still spluttering and could have done with a bit more support in the form of slightly lower interest rates. Indeed, the seasonally adjusted unemployment rate (which is, admittedly, a lagging indicator) hit 5.6% in the June quarter – the highest level in more than a decade.
One might wonder whether a dual mandate would have seen the committee delay lifting the OCR.
The Herald asked Breman this a few weeks ago.
While she tried to remain apolitical, her answer suggested a dual mandate would not have made a difference.
“We would always look at how the labour market is affecting inflation, and how inflation and what we do with interest rates are affecting the labour market. They’re not unrelated, and over the medium term, they tend to give the same outcome,” she said.
“To me, it’s important that people understand that getting back to low and stable inflation is also good for growth and jobs.”
Breman explained that if inflation was in check and prices only rose modestly, people would be able to spend more, which would support businesses and job growth.
She also made the point that the MPC’s remit requires it to maintain price stability while avoiding “unnecessary instability in output, employment, interest rates, and the exchange rate”.
Answering questions at a BusinessNZ event in July, Reserve Bank chief economist Paul Conway similarly noted the MPC wasn’t mandated to target inflation at all costs.
He pointed to the OECD report and questioned whether it was necessary for the mandate to change with every finance minister.
However, Conway also suggested a dual mandate may change the way the OCR was set.
“I think a different remit would mean a different path for interest rates, but I can’t be too specific on that because we haven’t done the whole process with the dual mandate front of mind,” he said.
So there you have it – an example of the uncertainty that would come with a dual mandate, for what? For Labour to say it cares about jobs.
If it really did, it would leave the Reserve Bank to get on with its job after a turbulent few years and focus on how government policy could better support the labour market.
The market is becoming familiar with the new governor and individual committee members’ views on monetary policy being made public.
The machine is running smoothly. If it ain’t broke, don’t fix it.
Jenée Tibshraeny is the Herald‘s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
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