Two smart measures to make our Reserve Bank fit for purpose

The Treasury released papers last week recommending that the Reserve Bank move towards a committee structure for making future decisions on the Official Cash Rate (OCR). New Zealand is now alone in relying on a single person – the Reserve Bank Governor – to set the OCR. No other country in the developed world leaves such an important decision to one person.

Treasury gave the following reasons for why it supports the move to a board/committee governance structure:

  1. Boards make better decisions than individuals;
  2. Boards have superior institutional memory, judgement, experience, and expertise;
  3. Boards provide greater continuity when a governor changes;
  4. The role of the Reserve Bank has broadened since its inception, increasing the range of skills needed to deliver effective monetary policy;
  5. There are higher risks of poor judgement with a single decision-maker;
  6. Board monetary policy decisions have more ‘legitimacy’ in a democracy;
  7. External consultation with the BNZ, Westpac, NZIER, Berl, and Infometrics unanimously supported moving to a board governance structure;
  8. We are now an outlier with international best practice.

Treasury say, “It would be wishful thinking to just hope future Governors will be wise in their decision making. Instead, it is a change in incentives or institutional structures that would have greater likelihood of having this desirable outcome.”

But Bill English isn’t impressed. He’s comfortable with the status quo even though every other OECD country now accepts that a board makes better decisions than a single person.

To re-ignite this important debate publicly, I’ve drafted new law in the form of a member’s bill to make this simple, uncontroversial change to the Reserve Bank’s governance structure along with the timely publishing of board minutes – another standard practice elsewhere in the OECD that improves the transparency of the Reserve Bank’s decisions.

Why settle for good governance when we can have excellence, the Treasury ask. I agree.


4 Comments Posted

  1. As your future coalition partners have intimated that they will be intervening in the setting of rates, it all seems a little academic as any future changes or decisions will be over ridden for political gain.

  2. When the Reserve Bank governor was meant to be mechanically following a rule to achieve a target, having a single person probably provided better accountability; ie they could in principle be fired.

    Since they started to be expected to achieve the target only over the medium term, they do have a more complex decision problem.

    I would be worried if the banks liked the change because each of them hoped to co-opt one board member.

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