Finance Minister Grant Robertson and the incoming Governor of Reserve Bank of New Zealand (RBNZ) Adrian Orr on Monday signed a new policy targets agreement in line with proposals raised before and during the general election.
The new policy brings in a mandate on employment.
RBNZ said it will now be required to help maximise sustainable employment as well as try to keep inflation near 2%.
Radio New Zealand described this as the first significant change to the bank's riding instructions in nearly 30 years.
Robertson said the change deliberately does not have a numerical target, and will allow the central bank the flexibility in making decisions that help create and retain jobs.
“The importance of monetary policy as a tool to support the real, productive economy has been evolving and will be recognised in NZ law by adding employment outcomes alongside price stability as a dual mandate for the Reserve Bank, he said.”
Radio NZ said central banks in the United States, Norway and Australia all have similar mandates.
Adrian Orr said many factors would contribute to maximising employment and the RBNZ would be transparent in explaining how it factored those into its decision making.
However, former Reserve Bank chairman Arthur Grimes said the new policy was “crazy” and would destabilise the economy. Ex-Reserve Bank governor Don Brash, who also spent time as a National MP, said the changes were a mistake, but Business and Economic Research Ltd chief economist Ganesh Nana was in favour of the broader mandate.
The bank's legislation was also to be changed to establish a monetary policy committee of seven members to set interest rates.
The committee will have four RBNZ officials and three outside experts and the minutes of the meetings will be published. A Treasury official will sit on the committee as an observer but will have no involvement in the decision making.
Radio NZ pointed out that an internal RBNZ committee already exists to set interest rates.
The agreement continues the requirement for the Reserve Bank to keep future annual CPI inflation between 1% and 3% over the medium-term, with a focus on keeping future inflation near the 2% mid-point.
In a joint statement with Minister Robertson, the RBNZ said the new focus on employment outcomes was an outcome of Phase 1 of the Review of the Reserve Bank Act 1989, which the Ardern coalition Government announced in November 2017.
“Widening the committee to include external members also brings the benefit of diversity and challenge in our thinking, while enhancing the transparency of decision-making and flow of information,” Orr said.
ANZ chief economist Sharon Zollner said the changes had been well signalled and would bring the RBNZ into line with what's regarded as best international practice.
A Bill will be introduced to Parliament in the coming months to implement Cabinet’s decisions on recommendations from Phase 1 of the review. As well as legislating for the dual mandate, this will include the creation of the committee for monetary policy decisions.
Sources: rbnz.govt.nz and radionz.co.nz