Government returns Reserve Bank to single mandate in first law

Wednesday, 13 December 2023

The National-coalition Government has passed its first law, returning the Reserve Bank to having a sole focus on inflation and not also unemployment.

The policy shift for the Reserve Bank was campaigned on by the National and ACT parties and has been touted as a measure to reduce inflation and therefore the rising cost of living, though no near-term change to prices can be expected.

“We understand that for so long as inflation remains out of control then New Zealanders will continue to suffer. They will continue to suffer from price increases that erode the value of their savings,” said Finance Minister Nicola Willis in the House on Wednesday afternoon.

“We have a Government now that is crystal clear it wants inflation out of this economy. It wants price stability back. It wants inflation gone.”

She said the passing of the law marked a return to “proven economic orthodoxies” after the Labour Government’s “six years of failed experimentation”.

But the Opposition opposed the move as a “journey backwards” that lacked evidence.

“Inflation is indeed forecast to be coming down, as we would expect and as we would hope when the Reserve Bank is doing its job. But nothing in this legislation is going to make that happen quicker. The members opposite are selling New Zealanders an untruth here,” said Labour finance spokesperson Grant Robertson.

The law, passed under urgency, will require the Reserve Bank, which independently of the Government controls monetary policy, to exclusively consider inflation when making decisions about rising or reducing its interest rate, called the official cash rate.

The official cash rate is the tool used by the Reserve Bank to influence interest rates across the economy, rising or reducing the cost of borrowing, which heats or cools economic activity with the aim of inflation at a target rate of between 1% and 3%.

It will no longer be mandated to consider the impact of its decisions on employment, a requirement imposed by the Labour Government in 2018.

Robertson, who gave the Reserve Bank its dual mandate, said the Reserve Bank’s mandate has “always been about making sure that prices are stable”.

“The thing that's got New Zealand through the recent global cost of living pressures and the spikes in inflation and the increases in interest rates that followed from that is because people have been in work.

“So keeping the eye on the ball, on inflation? Critical. And the Reserve Bank did it. Keeping the eye on the ball of keeping people in work and making sure they've got money to be able to put kai on the table—that matters too.”

Green Party MP Chlöe Swarbrick said the Reserve Bank governor had confirmed there was “no conflict” between the two mandates, and no trade-offs had been taken.

“This bill will not do what it says on the tin and what the Government is promising that it will do.”

Reserve Bank board chairperson Professor Neil Quigley said the change to its remit would “reiterate our focus” on reaching a low and stable inflation rate.

After passing the Reserve Bank of New Zealand (Economic Objective) Amendment Bill, the Government began passing the Fair Pay Agreements Act Repeal Bill, to unwind the sector-wide employment bargaining regime set up by the Labour Government.