Reserve Bank wants to hear people's views on how it does its job

Wednesday, 1 June 2022

• Reserve Bank says there is currently no specific guidance on how it should balance inflation and employment mandates

• It says it could face difficulties using monetary policy to stimulate the economy during future downturns if inflation is low

The Reserve Bank’s many armchair critics and supporters are being given a rare chance to tell the bank whether and how it could do its job better.

The central bank has to review its monetary policy remit every five years, although it will be Finance Minister Grant Robertson who ultimately decides whether any changes are justified, next year.

Reserve Bank policy research manager Gael Price said the bank’s dual goals of achieving price stability and “supporting maximum sustainable employment” were not expected to be up for negotiation as they were set out in legislation.

But a discussion paper released by the bank indicated possible areas of reform could include the way in which it tries to balance those goals, and the details and wriggle room within its current inflation remit, which is to keep future inflation between 1% and 3% over the medium term”.

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The Reserve Bank acknowledged in the paper that there could be situations where it faced a trade-off between price stability and maximum sustainable employment in the short to medium term, and that there was “currently no specific guidance” on how it might balance those objectives.

It is also seeking views on whether it should recommend the Government amends its remit to aid its response to future economic downturns.

The bank said it could face difficulties using monetary policy to stimulate the economy during future downturns if inflation was low.

“More radical options” to address that could include increasing the inflation target, or making clear that the bank would allow inflation to run higher after a period of low inflation.

But it also made clear there were drawbacks with many alternative approaches that the bank did not currently take towards achieving its remit.

Monetary policy has become unusually controversial over the past two years, after the Reserve Bank slashed interest rates and pumped $54 billion of liquidity into the financial system through its policy of quantitative easing.

Critics have blamed that for causing a house price bubble and increasing economic inequalities, although Reserve Bank governor Adrian Orr has made clear he thinks its influence over house prices can be overstated and that he has no regrets.

Price said the bank expected to hear what people genuinely found interesting about the economy during its review.

“Some of that will be relevant to monetary policy, some of it will be to relevant other policy areas, and we still hope that people will share their genuine views with us.

“If we receive a lot of feedback that's not something that we can action, we'll do our very best to make sure it finds its way to the right people.”

Chief economist Paul Conway indicated the bank wanted to lift its communication and engagement with New Zealanders.

“My experience is that people live in the economy, they feel these pressures and forces acting on them and typically – if you can cut back on the jargon – have a pretty reasonable understanding of how it all fits together,” he said.