Graeme Wheeler: Decision making in the Reserve Bank of New Zealand
Speech by Mr Graeme Wheeler, Governor of the Reserve Bank of New Zealand, to the
University of Auckland Business School, Auckland, 7 March 2013.
* * *
I'm sure that central banking was the furthest thing from his mind when the British
mountaineer, Eric Langmuir aptly said:
"A decision without the pressure of consequence is hardly a decision at all".
Central bankers are often criticised for avoiding decisions, although leaving policy settings
unchanged is often a major decision in itself. Sometimes they are accused of communicating
in a secret code with the real meaning known only to other central bankers. So how do we
undertake important policy decisions in the Reserve Bank and how do we endeavour to
communicate?
i) Operational independence
In 1990, the Reserve Bank became the first modern central bank to have a legislated
structure in which the government took the lead in setting the objective, while the central
bank had operational independence in, and formal accountability for, the execution of
monetary policy. New Zealand also led the way with flexible inflation targeting, a framework
now widely adopted by central banks across the OECD region. The 1989 Reserve Bank of
New Zealand Act states that "the primary function of the Reserve Bank is to formulate and
implement monetary policy directed to the economic objective of achieving and maintaining
stability in the general level of prices".
The legislation created provision for a Policy Targets Agreement (PTA) between the Minister
of Finance and the Governor of the Bank. In practice, the PTA defines the objectives of the
Bank, specifies an inflation range representing price stability and outlines considerations that
the Bank must give weight to in framing monetary policy decisions. The current PTA, signed
on 20 September 2012, introduces the goal of keeping future average CPI inflation near the
two percent target mid-point of the one percent to three percent range. Like its predecessor
PTAs, it also requires the Bank to seek to avoid unnecessary instability in output, interest
rates, and the exchange rate.
The Governor's responsibilities and obligations are conferred and imposed under the 1989
Reserve Bank of New Zealand Act, the 2009 AMLCFT Act, the 2010 Insurance (Prudential
Supervision Act), to which is expected to be added the Non-Bank Deposit Takers legislation
currently in the House. The Governor has the power to act for the Bank on all matters within
the ambit of the Acts that are not required to be dealt with by the Board of the Reserve Bank
(which relate to the appointment, remuneration and removal of the Deputy Governors). The
Governor may delegate decision making authority to other officers of the Bank.
ii) The bank's span of responsibilities
The Reserve Bank is a full service central bank and its responsibilities are broader than most
other central banks. Not all central banks are responsible for prudential and regulatory
oversight of the banking and payment systems, or have the authority to undertake exchange
rate intervention. In addition, the Bank has an extensive programme of financial
stabilityrelated initiatives underway that includes Open Bank Resolution, the introduction of
macroprudential instruments, a review of the payments system, and implementation of Basel III
capital requirements. The Bank has also taken on responsibilities for anti-money laundering
and regulation of insurance companies and non-bank deposit takers.
iii) Important checks and balances
The checks and balances and accountability mechanisms relating to the Bank are
considerable and include:
•
Publication of an annual report, at least two Monetary Policy Statements (we do
four), and two semi-annual Financial Stability Reports. The Bank's reports are
reviewed by Parliament's Finance and Expenditure Committee, the Board of
Directors of the Reserve Bank, and the Bank provides press conferences around
each Monetary Policy Statement and Financial Stability Report.
•
External auditing of the Bank's financial reporting, oversight by the Audit Committee
of the Reserve Bank Board, and a strong in-house internal auditing function that
reports to the Governor and works closely with the Board's Audit Committee.
•
Publication of regulatory impact assessments of any prudential policy that it adopts.
•
Monitoring and oversight by the Board of Directors of the Reserve Bank, which acts
as agent to the Minister of Finance in reviewing how well the Bank meets its
legislative responsibilities. The Board reviews the Bank's performance under the
PTA, and its efforts to promote the maintenance of a sound and efficient financial
system. In considering the Bank's monetary policy decisions, the Directors receive
all of the papers discussed by the Bank's Monetary Policy Committee, the written
advice that the Governor receives from individual members of the Monetary Policy
Committee, and webcasts of the Governor's press conferences.
The Board meets nine times a year (four times a year outside of Wellington where
receptions are held with the business community) and provides advice to the
Governor on various management issues. The Board assesses the Bank's
performance in meeting its obligations and responsibilities, discusses this with the
Minister of Finance, and publishes its review in the Bank's Annual Report.
•
The Minister of Finance's powers under the Reserve Bank of New Zealand Act to
direct the Bank to formulate and implement monetary policy for different economic
objectives to those specified in Section 8, and to determine the basis for foreign
exchange intervention by the Bank. The most coercive powers exercisable against
registered banks may only be exercised by the Minister, or with his consent. These
powers must be exercised transparently, and have not to date been used.
iv) The policy decision making framework
In order to assist with major policy decisions, we recently introduced a Governing Committee,
comprising the Governor, the two Deputy Governors and the Assistant Governor, under the
chairmanship of the Governor. The Governing Committee will discuss all major monetary and
financial policy decisions falling under the Bank's responsibilities, including decisions on
monetary policy, foreign exchange intervention, liquidity management policy, prudential
policy (both micro and macro) and other regulatory policies. To date, individual Governors
have taken responsibility for particular areas of the Bank, such as operations, monetary
policy and financial stability. Going forward Governors will have more individual and
collective involvement in key decisions taken across all areas of the Bank. This is the same
decision making framework adopted by the Bank of Canada, which also has a single
decision maker model. As with the Bank of Canada, the Governor retains the right of veto on
committee decisions. The Committee formalises and expands past practice.
Several other central banks, including the central banks of Brazil, Mexico, and Sweden,
make monetary policy through a central committee comprising the Governors, although
sometimes other internal members are included. These committees benefit decision making
by pooling the knowledge, wisdom, and expertise of individual Governors. Such committees
bring strength, especially where considerable uncertainty is involved, and can mitigate
extreme preferences of an individual.
The Bank's Governors team has extensive experience inside and outside the Reserve Bank.
While the change represents a management rather than governance initiative, the Governing
Committee will maximise the knowledge and experience of the Governors individually and as
a collective, rigorously test ideas and build consensus around major policy decisions.
Analytical and policy papers are discussed in several important committees including the
Monetary Policy Committee, Macro-financial Committee, Financial System Oversight
Committee, and the Assets and Liabilities Committee (which examines impacts of portfolio
decisions and changing relative prices on the Bank's balance sheet). These committees
have clear terms of reference, mainly meet fortnightly, and are chaired by a Governor.
Usually decisions are taken at the committee meeting, but major and complex policy
decisions will often be referred to the Governing Committee. Management decisions are
taken at weekly meetings of the Bank's Senior Management Group and all communications
issues and requests are discussed weekly at the Communications Committee.
v) Communicating policy decisions
We are expanding our on-the-record speaking by increasing the number of speeches,
broadening the range of topics while remaining within the Reserve Bank's framework, and
increasing the number of speakers. At the same time, the Bank will continue its extensive
off-the-record briefings to groups ranging in size from 15 to 400 people, but we will become
more selective in the 80-100 briefings we provide each year. We are also expanding our
communications through social media, in-house videos, webcasts and other online channels.
We provide considerable background briefings to the media, but announce our policy
decisions through our publications, speeches, and press conferences. We will also provide
six-monthly briefings to the caucuses of the political parties, and are redesigning our website
to expand its information content and increase its accessibility.
To be effective, monetary policy requires transparency in terms of policy goals and how
these are to be achieved. The former is contained in the Policy Targets Agreement; the latter
through our Monetary Policy Statements, OCR announcements, speeches and press
conferences. In commenting on monetary policy decisions and especially those relating to
the official cash rate, we are conscious that traders pre-position themselves prior to policy
announcements and that the exchange rate and interest rate spreads can alter depending on
the policy decision and the language that accompanies it. Above all, we want policy
statements to accurately reflect the economic conjuncture and outlook as we see it, and the
range of considerations we are weighing in fulfilling our responsibilities. In the case of
monetary policy, these include implementing monetary policy in a sustainable, consistent,
and transparent manner, having regard to the efficiency and soundness of the financial
system, and seeking to avoid unnecessary instability in output, interest rates, and the
exchange rate.
The 90-day interest rate projection contained in the Monetary Policy Statement is a form of
forward guidance as to our expectations of movements in the Bank's Official Cash Rate. It is
intended to help businesses and households plan with greater confidence in managing their
consumption patterns and saving and investment decisions, and to help shape expectations
about the future path of inflation and interest rates. This also helps market participants to
anticipate the Reserve Bank's policy responses as new data becomes available. As with
most conditional projections, the interest rate path is affected by the risks and uncertainties
that usually increase with time. In practice, the balance of language around the projection is
at least as important as the projection itself in shaping expectations of the outlook. When
market expectations adjust smoothly and efficiently, it can diminish the need for larger policy
adjustments by the central bank that could otherwise unsettle markets and have greater
impacts on asset prices and spending decisions.
Concluding comments
Global financial markets are still dealing with the major regulatory changes and the massive
adjustments taking place in government, corporate, financial sector and household balance
sheets in economies that generate around two thirds of world output and over three quarters
of cross border capital flows. The spill-overs from these adjustments and the fiscal and
monetary responses to them can be especially challenging in small open economies with
stronger growth prospects, and where there are high expectations of what central banks can
achieve.
The Reserve Bank endeavours to provide an accurate assessment of the implications and
challenges of these adjustments for the New Zealand economy. In doing so, we seek to be
clear on what we can and cannot influence, and how government policy instruments and
private sector responses can increase our effectiveness. At the same time we've been
extending our regulatory oversight, building the protections available to taxpayers in the
event of bank failure, and increasing the range and scope of instruments to help deliver price
stability and increase the efficiency and soundness of the domestic financial system.
Within the Bank we are looking to the team of Governors to debate major policy matters
leading to decisions, and increasing the frequency and scope of our on-the-record reporting.