30 May 2001
Media Statement
WEDNESDAY
Govt's response to Monetary Policy Review
Finance Minister Michael Cullen today released the Government's proposed response to the recommendations of the
Independent Review of the Operation of Monetary Policy by Professor Lars Svensson.
"I am now seeking feedback from the other political parties to achieve the highest level of cross-party consensus," he
said.
Letters setting out the Government's position were sent out earlier this month to the various finance spokespeople: Bill
English [National], Winston Peters [New Zealand First], Rodney Hide [Act], Rod Donald [Greens] and Peter Dunne [United].
Dr Cullen will contact those people within the next couple of weeks to discuss their reaction.
"It is important that any changes enjoy the broadest possible support to ensure policy stability in this area," Dr
Cullen said.
PRESS RELEASE ENDS
ATTACHED: Table outlining the Review recommendations, the Government's proposed responses to, and Comments on, them.
Table 1: Proposed responses to the Review’s recommendations
Governance
Review’s recommendation 1
The Board of Directors should only consist of non-executive directors
Proposed response
The Governor should not be Chair of the Board but should continue to be on the Board.
The Deputy Governors should not be on the Board.
COMMENT
I consider the balance between the Board’s independence and its access to the information necessary to enable effective
monitoring can be best achieved by retaining the Governor on the Board.
Minor legislative amendments are required.
Review’s recommendation 2
To ensure sufficient independence of the Board the chair of the Board should be selected by the non-executive directors
among themselves and not by the Treasurer
Proposed response
Support
COMMENT
An independent chairperson is important to the maintenance of a credible and unbiased system of accountability for the
Bank and the Governor.
Minor legislative amendments are required.
Review’s recommendation 3
The Board of Directors should publish an annual report with an evaluation of the Bank’s monetary policy. This report
could be separate or part of the Bank’s Annual Report. The Board may appoint a panel of experts for its assistance.
Proposed response
Support
COMMENT
This proposal will raise the visibility of the Board and strengthen the accountability of the Bank.
The non-executive directors have indicated their support for this proposal making legislation unnecessary. Legislation
may also restrict the ability to make future changes that would enhance the effectiveness of monitoring.
Decision-making
Review’s recommendation
A formal Monetary Policy Committee of the Reserve Bank, responsible for monetary policy decisions, should be formed. The
committee should have five members the Governor as chair (with the casting vote), the two Deputy Governors, and two
other senior Bank staff. The Governor and Deputy Governors should be appointed in the same way as now. The MPC should
only be responsible for decisions related to monetary policy. In all other respects the Governor should continue to be
the single decision-maker of the Bank. A suitable time for this is at the beginning of the next term of Governor. The
two senior staff should be appointed by the Board of Directors on the recommendation of the Governor.
Named votes and non-attributed minutes should be published with a lag of about two weeks.
Proposed response
Do not support.
I favour retaining the Governor’s sole responsibility for monetary policy. I believe there may be some benefits to the
decision-making process by exposing the Governor to a wider range of views when decisions are made.
This may be achieved by appointing external people with relevant skills, experience and knowledge of the economy, to
advise the Governor on the state of the economy and on monetary policy decisions.
I have invited the Bank to consider the best way to improve external input into the decision-making process,
particularly from those with a practical knowledge of financial markets.
COMMENT
Consistent with the operational independence of the Bank, the Bank is responsible for deciding how best to incorporate
external input into the decision-making process.
Accountability
Review’s recommendation 1
The Reserve Bank should fund an annual conference for the evaluation of monetary policy. The conference should be
organised by an independent committee.
Proposed response
I agree there may be some merit in a regular conference, although it should be convened on either a biennial basis or at
the request of the Bank’s Board or its external advisors.
Review’s recommendation 2
Parliament’s Finance and Expenditure Select Committee should, with the help of appointed experts, conduct thorough and
detailed hearings of the Governor and other Reserve Bank officials. This may require additional resources for the
Committee.
Proposed response
I am discussing with FEC the best way to meet their needs
Policy Targets Agreement
Review’s recommendation 1
Section 2b (of the PTA) should be modified to read “…the policy target shall be 12-monthly increases in the CPI of 1.5%
over the medium term”
Proposed response
I agree with the need to be explicit about the medium term orientation of monetary policy, but do not support the
proposal for a point target.
COMMENT
The Bank already targets the mid-point of the 0-3% band making any gains from moving to a specific point small and
potentially confusing the key message of flexibility.
Review’s recommendation 2
This change to the PTA should be made at the beginning of a new term for the Governor
Proposed response
The decision to renegotiate the PTA should lie with the Government of the day. I expect that in the future changes to
the PTA will be less frequent than they have been in the last 10 years.
COMMENT
I will seek to clarify the flexible and medium-term orientation of monetary policy the next time the PTA is
renegotiated.
DATA ISSUES
Review’s recommendations
Statistics New Zealand should collect monthly data on the Consumer Price Index and industrial production
Proposed response
Do not support
COMMENT
I have little confidence that monthly data would provide statistically meaningful data, rather they would be subject to
a great deal of volatility. Continued progress on the other priorities for statistics (eg the timeliness of data
releases) will yield better value for money.
ENDS