RBNZ needs a new strategy with its new Governor
Dr Alan Bollard has decided to resign from his role as Reserve Bank Governor in September leaving the Board of the bank to choose a replacement. Bollard has had a number of critics during his time as Governor (including me). The criticisms have centred on the slow pace of interest rate hikes in the mid 2000s which did not deal with domestic inflation and caused bigger problems down the track, and the reluctance of the bank to use alternative measures to the Official Cash Rate mechanism. The impact of these issues was of course a high and volatile exchange rate which has made exporting, and controlling our current account deficit, much more difficult.
A change in the Governor offers an opportunity to review the Policy Targets Agreement with the Government:
• Does the Governor continue to make decisions or do we use a committee?
• Does inflation remain the only target of the RBNZ?
• Should macroprudential tools in addition to interest rates be used by the RBNZ?
On the first point a committee would reduce the likelihood that the mistakes that occurred in the mid 2000s would occur again. Those problems are explained in the links below:
More and broader opinions mean less likelihood of mistakes being made. The Reserve Bank Board already provides a group capable of reviewing monetary policy decisions and could be broadened to include a much wider range of expertise. We tend to see technocrats take up the position of Governor and it would be good to see people with real economy backgrounds included to provide balance.
On the second point, it seems overly simplistic that the only target of monetary policy is inflation - employment, growth and exports are not considered. This dates back to the inflation problems that existed in the 1970s and 80s. The argument against adding other objectives is that some central bankers don’t think they are able to influence wider objectives using just the Official Cash Rate (OCR).
This brings us to the last point. Central banks around the world have been using macro prudential tools and interest rates to address imbalances in the economy with considerable success. Quantitative easing measures have been well documented in the United Kingdom and United States, but other more subtle measures such as loan to value ratios, long-term funding and domestic funding requirements have also been used. There is a trend from central banks to control the volume, source and application of money in the economy rather than a single minded focus on price.
Additional tools would limit the OCR’s impact on the exchange rate and address domestic inflation from the selective control of credit volumes.
An export lead recovery has been the stated goal of the Government since they entered office. So far there has been only tinkering around the edges rather than any real change in policy that would see this happen. For an export lead recovery we first need to remove the biggest barrier to growth – an overvalued and volatile exchange rate.
If the aim of the Government is really to increase export growth then, at least, we need everyone pushing in the same direction, including the RBNZ.