Data Flash (New Zealand) NZ:
Monetary Policy;
Government releases findings of Svensson review
28 February 2001
The Process
The Government released the findings of the review into the operation monetary policy, which has been conducted over the
past six months by the Swedish economics professor Lars Svensson. Key elements of the terms of reference focused on the
way the RBNZ operates policy within the current Policy Targets Agreement; the policy instruments used by the RBNZ; and
decision-making processes and accountability structures.
The Findings
The report recommends that the RBNZ should continue to interpret the 0-3% inflation range as a medium-term target of
1.5% and consideration be given to making this an explicit instruction when the Policy Targets Agreement next comes up
for renegotiation;
an internal committee be established to take responsibility for monetary policy decisions (the committee should be
chaired by the Governor and comprise two Deputy Governors and two senior RBNZ staff);
Parliament's Finance and Expenditure Committee conducts thorough and detailed hearings of the Governor and other RBNZ
officials with the help of appointed experts and other assistance;
the Governor and the Deputy Governors no longer sit on the RBNZ Board (which has no policy-making responsibility, but
supervises the performance of the Governor and the organisation);
Statistics NZ collect monthly data on the CPI.
Our View
The Svensson report did not contain any notable surprises. The recommendation of entrenching 1.5% as the medium-term
inflation target was probably somewhat stronger than expected, but is of little practical relevance as the RBNZ has been
operating with an informal target of that nature since the inflation target range was widened to 0-3% in late 1996.
Regarding the accountability and governance issues, the recommendation to take sole decision-making responsibility away
from the Governor and remove him from the RBNZ Board should not be seen as a lack of confidence in Dr Brash's
performance. Instead, the reviewer was clearly intent on bringing the RBNZ's decision-making structure closer to
international norm. A decision-making model with external members of the Monetary Policy Committee was rejected mainly
because of potential conflicts of interest those MPC members might face. The issue of conflict of interest - in this
case that of the Governor and his Deputies - also drove the recommendation regarding the composition of the RBNZ board.
Overall, the report did not contain anything that should make markets concerned about the operation of monetary policy
in New Zealand. The Minister of Finance will take advice and report on the Government's reaction to the findings in May.
Ulf Schoefisch, Chief Economist, New Zealand,
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