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The Rise (and Fall) of the RBNZ

Back in the 1980s our Reserve Bank was lauded around the world. It became the first central bank to formally target inflation, as directed by the RBNZ Act 1989. That idea was copied in many nations and was often credited with helping reduce inflation rates. During that period, starting in 1984, I worked at the Bank when Dr Brash was Governor.

Many years later, the legislation which established the inflation targeting regime came under fire. Labour wanted to widen the mandate so the RBNZ would have several objectives - the Party saw the inflation focus as too narrow. It wanted the Bank to act to lower the exchange rate. There was a proposal to introduce a "variable savings rate" regime which would allow the Bank to vary KiwiSaver contributions. It sounded too complicated to work in practice.

I had an opportunity to influence things when I bumped into one of the members of Labour's Shadow Cabinet at a conference around 2014. It was clear that they were determined to change the RBNZ Act 1989 so my strategy was to help them do so with least possible damage. Consequently I suggested that if they wanted to widen the mandate, why not simply go for a US Federal Reserve style dual mandate, which specified achieving high employment and stable inflation as objectives? I will never know if that was the reason behind the subsequent policy adopted by Labour, but they did shortly shift to promoting the dual mandate.

Fast forward to November 2020. The Governor now talks regularly about matters outside even the dual mandate, including issues related to the environment. And today the Finance Minister has requested the RBNZ to consider ways to target house prices. Few of us would have ever imagined we could end up in this position. How could we go from an RBNZ focused on a deliberately narrow inflation target which it achieved so admirably to an RBNZ going gang-busters with a $100 billion quantitative easing program - only to find it may have caused house price hyperinflation - only to be asked to put on the brakes when it is still pushing on the accelerator? All at the same time the institution is talking about another target, namely environmental outcomes. How many objectives do we have now?

The RBNZ appears to have morphed into a politicized government department. It has gone off the rails.



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