Time to modernise role of Reserve Bank

The dilemma faced by the Reserve Bank Governor in setting the official cash rate highlights the need to broaden the objectives of the bank to put jobs and the overall well-being of the economy at the heart of its mandate, Labour Finance spokesperson Grant Robertson says.

“Commentators are in agreement that the Graeme Wheeler is likely to leave the official cash rate where it is tomorrow. On the basis of his current mandate that may well be justified, but with unemployment still too high the narrowness of that mandate has to be addressed.

“At the moment the sole objective of the Reserve Bank is to formulate monetary policy to achieve and maintain price stability. Controlling inflation is important, and no one wants to return to the Muldoon era of double digit inflation. But as the sole focus it leaves the overall health of the economy exposed.

“For the past few years we have had low inflation but stubbornly high unemployment. It has not dropped below 5.5 per cent since the global financial crisis, and bank economists are now predicting it will reach 6.5 – 7 per cent over the coming months. That’s more than 150,000 Kiwis out of work.

“At the same time the Reserve Bank has not met the two per cent midpoint of its inflation target since the current Policy Targets Agreement was signed in 2012.

“In recent times we have seen an overvalued dollar and high interest rates hurt the prospects of our exporters. This week we have seen the trade deficit widen as exports have sharply declined. 

“We need a monetary policy that supports our productive sector across economic cycles and puts employment up as a core objective.

“The Reserve Bank Act was designed in the 1980s and is out of date and out of touch with the changes in the global economy.

“Labour supports our independent Reserve Bank. A broadened mandate would mean some changes for the Bank, and we would review other aspects of the Bank’s legislation and powers, including the Policy Targets Agreement, to ensure it would work in practice. 

“It is time monetary policy served the needs of the people rather than the other way around,” Grant Robertson said.