“A different group of intelligent people, under the same framework, would risk making the same mistakes.”
Inflation needs to be the focus
The reviewers supported the coalition Government’s decision to require the Monetary Policy Committee to primarily target price stability, rather than price stability and employment, as was the case during the pandemic.
Labour has committed to reinstating the Reserve Bank’s dual mandate if elected to govern.
The reviewers also backed the recent decision for individual committee members’ views on monetary policy to be published.
However, they believed more could be done to keep members laser-focused on containing inflation and encourage them to more robustly debate how to set policy.
The findings of the review, conducted by Massachusetts Institute of Technology Professor Athanasios Orphanides and former Reserve Bank Assistant Governor David Archer, were made public on Tuesday.
The review was commissioned by Treasury, under the direction of Finance Minister Nicola Willis, late-last year.
Specifically, the reviewers recommended the committee test a wider range of scenarios.
They said it should pay more attention to current conditions: give more weight to real interest rates, near-term inflation and incoming economic data.
The reviewers said there could also be better crisis preparedness, suggesting the Reserve Bank regularly review and test additional monetary policy tools, so they are ready when needed. Indeed, the reviewers noted neither the Reserve Bank nor retail banks had their systems ready to deal with a negative OCR during the crisis.
They said more should be done to ensure Monetary Policy Committee members share different perspectives and have access to more research when setting policy.
The reviewers interviewed a raft of current and former Reserve Bank staff – including Orr – public and private sector economists, academics, and Treasury staff as they did their investigation.
No big changes to be made immediately in response to review
Willis said the recommendations were largely operational, so would be leave the Reserve Bank to respond to them.
She didn’t believe the review necessitated a change to the Monetary Policy Committee’s remit or charter.
However, she said she sought advice on recommendations around the interaction between financial governance and monetary policy.
Reserve Bank Governor Anna Breman and chairman Rodger Finlay said the bank would carefully consider the review and use its insights to help inform future practice.
They noted that in 2022, a routine review the Reserve Bank does of its monetary policymaking every five years captured the Covid era covered by the external review.
Breman said bank was already implementing changes, further to lessons learned from the Covid period.
“The independent review offers additional insights that we will carefully consider alongside this work,” she said.
“Its findings could help inform improvements across the Bank, including initiatives underway to strengthen our modelling infrastructure and work in support of our 2028 advice on the Monetary Policy Committee remit.”
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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