Roger J Kerr questions how the Reserve Bank can keep missing its inflation target with no apparent ramifications

By Roger J Kerr

The conduct of monetary policy management in New Zealand is under increasing scrutiny as the RBNZ do not appear at all concerned that they have been breaching the 1% minimum annual CPI limit for more than two years now.

Inflation has been below the 1% level due the high NZ dollar value (TWI Index) and the collapse in oil prices in late 2104 and again in late 2015.

Whether there should be any censure or consequence for the RBNZ for failing to achieve their sole objective is a moot point.

The Governor of the RBNZ is accountable to the RBNZ Board of Directors for everything including achieving the inflation target band.

The inflation control accountability and performance assessment is under the Policy Targets Agreement (“PTA” – clause 9 of the Reserve Bank of New Zealand Act 1989) the Governor signs with the Minister of Finance.

Bill English may seek the removal of the Governor (through the RBNZ Board under clauses 49 and 53) if the RBNZ is not doing its monetary policy job, the performance of the Governor in ensuring the Bank achieves its policy targets is inadequate and a Monetary Policy Statement is inconsistent with the PTA.

Note that the Act does not allow the Governor to be dismissed simply for failing to meet the policy targets i.e. missing the 1% to 3% inflation band.

The criteria in the Act refer explicitly to the performance of the Bank and the Governor in pursuit of those targets. Therein lies the rub.

It appears that the RBNZ are not censurable for being outside the inflation target band for two years. They only suffer some consequences for poor performance if they were slack in their attempts to achieve the targets.

Looking back on this year and the rise of the TWI to 78.00 that has kept inflation below 1.00%, you have to conclude that the RBNZ did not do enough the stop the Kiwi dollar’s rise in the middle of the year.

They would argue that they could not cut the OCR in May, June and July because the housing market was on fire.

The rebuttal to that argument is they were far too slow in tightening the LVR banking regulations on the residential property market, not acting until the Government gave them a boot up the backside in late July. An earlier LVR change would have allowed an earlier OCR cut.

The other contentious issue with the RBNZ’s performance is when is the allowance for “temporarily” being outside the 1% to 3% inflation target band is no longer temporary.

In most people’s mind “temporary” would be two or three quarters, not eight quarters.

However, it seems the RBNZ themselves are conveniently (and rather suddenly) taking a very liberal interpretation of “temporary” with eight to 12 quarters outside the 1% to 3% limit being acceptable in their eyes against the context of  20 to 30 year business cycles.

I cannot find any reference to 20 to 30 year business cycles in the RBNZ Act and PTA.

Habitual breaching of any financial limit should be a serious matter.

If an interbank FX dealer, or corporate treasurer or fund manager continually break their dealing/hedging/investment limits there are immediate and serious consequences i.e. being fired!

The Minister of Finance has asked for the RBNZ Board to report to him six-monthly on performance of the Governor.

Bill English should also be questioning the RBNZ’s current interpretation “temporary” in respect to their breach of the PTA and requiring a definition that can be communicated to us all.

It would be news to most that the RBNZ can breach their limit continually for three years (the last two years and the next year) and there are absolutely no consequences.

Daily swap rates

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Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com