It is not clear that John Key will be able to keep the external image of National together until the election. If we look at the policies of Labour, Greens and likely coalition party NZ First on monetary policy, anyone who cares about central bank independence should be extremely worried.
How can we protect monetary policy from a Labour/Green government when the Reserve Bank is producing a lot of content and policy that is making it easier and easier for Labour/Green to sell the idea that the Official Cash Rate decision should be made by committee?
A starting point would be highlighing the ridiculousness of the US Federal Reserve when it comes to clear communication around quantitative easing. What journalists often gloss over is that each individual “Fed” has its own Governor whose opinion counts for a lot because they vote!
There is a hierarchy in the Federal Reserve system – with the Federal Reserve Bank of New York holding the position of power as it carries out the open market transactions the committee decides on and because New York is the centre of the US financial system.
If the Reserve Bank moved to a committee form, then monitoring the Reserve Bank would be costlier. Instead of keeping track of what Graeme Wheeler and occasionally Grant Spencer say, in order to arrive at some indication of where the RBNZ’s thinking is I’d have to follow every single committee member.
If these committee members were unionists, businesspeople, farmers or other non-economists then the monitoring costs would be even higher. What this does is lower the credibility of the Reserve Bank in carrying out its core function – price stability.
It also makes it a target for politicians because it would face more “top down” pressure for “targeted interventions” the committee thinks need attention. Also, there are officials at the Reserve Bank and Treasury pushing for more “targeted intervention”. As their notes and publications are released they need to be carefully examined by the economics blogosphere.
My non-negotiable position on the Official Cash Rate is that the Governor of the Reserve Bank is the only person who communicates the Reserve Bank decision and intentions.
There must be no committee! Obviously the Governor has a team of close advisors who help him out, but the unintended consequences of committee decision making would be horrendous.
Clarity of communication is far more important than many people realise. Imposing costs on everyone in New Zealand because your favourite sector can’t compete in a global marketplace is not acceptable, and over the next few months I’m planning to do some longer posts on monetary policy.