Reserve Bank rethink needed

16:00, Mar 19 2014

Labour Party leader David Cunliffe, addressing a business audience last week about his vision for the country's economy, reiterated his party's support for a capital gains tax, restrictions on foreign ownership and - inevitably - a review of monetary policy.

A few days later, not for the first time, Green Party co-leader Russel Norman told TVNZ's Q+A programme that raising the official cash rate was not the only answer to the threat of inflation and the Greens wanted a broader approach to monetary policy.

In fact, the OCR had sat at a record low of 2.5 per cent for three years when Reserve Bank Governor Graeme Wheeler lifted it by 25 basis points last Thursday and the Government thrives on mocking Opposition politicians who want to change monetary policy.

When questioned about the OCR increase, Associate Finance Minister Steven Joyce, typically, gave his Government credit for keeping interest rates down and inflation under control. He also referred to Opposition plans to change the Reserve Bank Act, saying history had shown that when governments go soft on inflation, the people who are hardest hit are those on low and fixed incomes.

Chris Eichbaum, a Reader in Government at Victoria University, has come out to bat for change - of a sort. Since the Reserve Bank Act was passed 25 years ago, he argued, it has enjoyed a high degree of cross-party support, but it is now time for a review. This need not involve throwing the anti-inflation baby out with the bathwater, nor the politicisation of a significant public institution. Any debate would be about the objectives and tools of monetary policy, Eichbaum acknowledged, but it would also be about the central bank's governance.

He threw in some issues for considerations, such as the role the bank's non-executive directors should play and whether their job should extend from governance to active participation in the formulation of monetary policy. If so, "who would we want on such a board"?

It so happens Mr Eichbaum served on the board from 2008 (appointed by Labour's Michael Cullen) until mid-2013. He has worked for various Labour ministers over the years, too. This opens him to the accusation his position is politically partisan. The governance issues he raises are worth examining, nevertheless, regardless of his political leanings.


Waikato Times