Wheeler may have sole power, but RBNZ monetary policy decisions are committee-driven

Thursday 10th September 2015

Reserve Bank governor Graeme Wheeler may be one of the few central bank chiefs worldwide to rule by fiat, with the sole power to change monetary policy, dictate terms to lending institutions and decide when to intervene in the currency market, but he says in reality decisions are driven by committee.

Wheeler cut the official cash rate a quarter point to 2.75 percent today and said another reduction is likely. His decision and the words he used to explain it sent the New Zealand dollar crashing down more than 1 US cent to 62.68 US cents. The trade-weighted index fell to 68.36 from 69.66.

Few individuals wield such power and the governor's powers have drawn criticism this year from the Green Party, which complained this year that Wheeler was hurting the economy by keeping interest rates artificially high. And in May, former Reserve Bank adviser Michael Reddell said the concentration of power in the governor was outdated and out of step with international norms.

But Wheeler today said there was "misunderstanding" about governance at the central bank. In the lead-up to the monetary policy statement there were "three days of very intensive discussions - probably with about 35 colleagues in the room" , where forecasts, risks and an assessment of the external economy were considered. That was followed by simulations , testing the "what ifs".

"In the end we agree on a set of forecasts and make the monetary policy decision," he said.

"In essence there's a committee of 12 people that give advice to the four governors," he said, referring to himself, deputy governors Grant Spencer and Geoff Bascand, and assistant governor John McDermott. Two of the twelve are from outside the central bank and come in four times a year as part of the MPS process.

"The four governors then make the decision," Wheeler said. "There's no example, at least in the past decade, of the governor not taking a decision consistent with the recommendation of the committee," he said.

Wheeler signed the latest version of the policy targets agreement with Finance Minister Bill English in September 2012, reiterating the goal of price stability as measured by keeping future annual inflation near the midpoint of a 1 percent-to-3 percent target range. Since signing, inflation has been outside the target range 62 percent of the time, based on actual and forecast inflation in the MPS.

Wheeler defended the bank's decision to hike the OCR four times in the first half of 2014 to 3.5 percent from a record low 2.5 percent, only to reverse course this year. Asked if last year's moves were a mistake, he said no.

"Last year when we started to raise rates we were the only country in the world running positive output gaps," Wheeler said. "At the time we raised rates, in terms of the data we had, I believe they were the right decisions." Subsequent changes to the landscape included the slump in dairy prices, which has left farmers this season facing their lowest milk payout in a decade.

BusinessDesk.co.nz

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