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Reining in the RBNZ

Any new government after the October election must rein in an out-of-control Reserve Bank and narrow its focus to long-term price stability, says the New Zealand Initiative.

Monday, September 11th 2023, 9:27AM 2 Comments

by Sally Lindsay

Blame for New Zealand’s inflationary spiral sits squarely with the Reserve Bank (RBNZ), it says.

Excessive money-printing, conflicting goals, grandiose aspirations and distractions, and a lack of core expertise have all contributed to the monetary policy failure, the Initiative says in its Prescription for Prosperity briefing paper aimed at the incoming government after the 14 October election. 

The paper says the RBNZ has fuelled inflation through its excessive monetary policy responses to Covid-19, resulting in massive losses to taxpayers, a house price whiplash, and a cost-of-living crisis – harming everybody.

As well, the Initiative says RBNZ Governor Adrian Orr’s forays into non-monetary areas such as climate change policy have heightened concerns about the bank’s focus and capabilities.

The Initiative’s policy recommendations to reset monetary policy are:

1.Amend the RBNZ Act

The Act should be amended to specify long-term price stability as the single monetary policy objective. By narrowing the focus of the RBNZ’s mandate, policymakers can make sure the central bank remains dedicated to its core purpose.

Long-term price stability is essential for fostering economic growth and therefore, prosperity, as it allows businesses and households to make well-informed decisions about investment and consumption.

2.Shift the RBNZ’s regulatory role to a new institution

Separating monetary policy and prudential regulatory functions is common elsewhere in the world including Australia where the Reserve Bank of Australia is charged with monetary policy and the Australian Prudential Regulatory Authority (APRA) is tasked with financial regulation.

Separating the functions into two organisations will improve governance and reduce the risk of political interference in the RBNZ’s core mission of price stability.

3.Limit RBNZ’s budget

The RBNZ’s budget should be limited to cover its monetary policy role, preventing the institution from engaging in matters beyond its scope, such as climate change and promoting the Māori economy.

While these issues are undeniably important, they fall outside the purview of a central bank. By constraining the RBNZ’s budget to its core function, policymakers could ensure the central bank remains focused on its primary objective of price stability.

4. Return the inflation target to 0–2%

The RBNZ’s inflation target should be returned to the 0–2% range instead of the existing target of 1–3%, which has proven to be insufficient in maintaining long-term price stability. A lower target range will encourage the RBNZ to pursue more prudent monetary policies, minimizing the risk of excessive inflation and promoting sustainable economic growth.

5.Stop the implementation of deposit insurance

The implementation of deposit insurance should be halted. While deposit insurance schemes can provide a sense of security for bank depositors, they risk inadvertently creating moral hazard by encouraging banks to engage in riskier lending practices.

By refraining from implementing such a scheme, regulators can maintain market discipline and encourage banks to act more responsibly, thus promoting financial stability.

6.Limit RBNZ’s discretionary ability to purchase securities to government paper

The Treasury has estimated losses on the RBNZ’s Large-Scale Asset Programme (LSAP) cost taxpayers around $10.5 billion – more than three times the bank’s equity position.

The crown’s exposure to losses under the LSAP happened without adequate parliamentary debate and scrutiny. The RBNZ’s actions were facilitated by finance minister Grant Robertson arranging for the crown to indemnify the RBNZ against those losses.

Better accountability is needed for such decisions. The RBNZ’s discretionary ability to purchase securities should be limited to purchases of government paper.

Such a restriction would prevent the central bank from intervening in the private sector and distorting the allocation of resources.

7. Ensure a credible timetable for reducing RBNZ’s balance sheet

Finally, the incoming government should establish a credible timetable for the RBNZ to reduce its balance sheet to pre-pandemic levels. The central bank’s asset purchases during the pandemic significantly radically expanded its assets and liabilities.

This poses risks to long-term financial stability and price stability. Such excess balances can become highly inflationary when individual banks decide the interest rate being paid on those balances is penal compared with what they can achieve by aggressively expanding their lending.

By committing to a clear and credible timetable for unwinding these positions, the RBNZ could signal its dedication to long-term price stability and bolster confidence in the economy.

Tags: New Zealand Initiative

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Comments from our readers

On 11 September 2023 at 11:58 am valkyrie6 said:
OMG someone with some common sense.! how overwhelmingly refreshing.

Go Woke go broke.
On 11 September 2023 at 3:55 pm Amused said:
Most economists now acknowledge that the RBNZ’s decision to reduce the cost of borrowing too low for too long resulted in inflation getting out of control, triggering the housing boom. During the pandemic when interest rates were at record lows the RBNZ also inexplicitly lowered the LVR requirements for property investors temporarily which was like pouring petrol on a bonfire at the time.

The RBNZ has conducted its own internal review and cleared itself of criticism over its handling of the pandemic with a few "friendly" peer reviewers concurring with it. This internal review was like asking the RBNZ to mark its own homework. In essence it was nothing but a back patting exercise. Written by the bank's own staff, it hinted at mistakes that have worsened house price inflation and the cost-of-living crisis, but then failed to say whether those mistakes were avoidable and if so, who should be held accountable for them.

Senior research fellow Bryce Wilkinson’s report on the RBNZ titled “Made by Government: New Zealand's Monetary Policy Mess” categorises the numerous mistakes the RBNZ made with its monetary policy decisions before and during the pandemic. Wilkinson said the RBNZ's senior executive levels, and the board lacked knowledge and experience in key areas such as monetary policy, macro-economics, and financial market regulation. The Bank has lost much technical expertise in monetary policy and institutional knowledge because of high turnover and its employment focus.

Wilkinson also highlights the political interference from the Finance Minister who has loaded the RBNZ with extraneous duties and remits in areas that had no relevance to monetary policy, and which could not be affected by it i.e. climate change and the Maori economy. He said as a result the RBNZ had lost credibility as an inflation targeting institution and had become partly politicised through the way it was being managed by the Minister. It made little difference that the RBNZ was in the same camp and had made the same mistakes as other central banks around the world. "The outcomes for New Zealanders count, and the inflation and fiscal cost outcomes were poor."

Wilkinson’s message to the next Government was that they need to pay serious attention to what changes they might make to reposition the Bank. “As a boat, it is off course and far from watertight."

The New Zealand Initiative’s paper simply illustrates what most New Zealanders have known for a while. As a country we are not being well served by the people in charge at 2 The Terrace, Wellington and big changes at the RBNZ need to be made post-election.


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AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.14 6.75 6.39
ANZ 8.64 7.74 7.39 7.25
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BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
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CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 6.79 - -
Co-operative Bank - Owner Occ 8.40 6.99 6.79 6.65
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 7.49 7.29 7.15
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
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Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.69 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.74 7.35 6.99
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 7.99 7.79 7.55
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 6.99 6.79 6.65
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.65 7.25 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 8.09 7.59 7.29
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 9.09 8.59 8.29
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 7.74 ▼7.09 ▲6.95
SBS Bank Special - 7.14 ▼6.49 ▲6.35
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 6.14 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 7.79 7.55 7.45
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TSB Special 8.64 6.99 6.75 6.65
Unity 8.64 6.99 6.79 -
Unity First Home Buyer special - 6.55 6.45 -
Wairarapa Building Society 8.60 6.95 6.85 -
Westpac 8.64 7.84 7.35 6.99
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - 7.24 6.75 6.39
Median 8.64 7.19 7.17 6.65

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