Reserve Bank of New Zealand (Monetary Policy) Amendment Bill

Thank you, Mr Speaker. I will make some concluding points. This is an excellent piece of legislation, of course, from the Minister of Finance, and what I want to talk about now, having talked about the dual mandate—we’ve talked about the dual mandate previously. I wanted to talk a little bit about the decision-making process.

Whilst the Reserve Bank already makes its decisions collaboratively, what this does is set that into the legislation by creating the monetary policy committee. Importantly, that committee has, essentially, three elements. It has internal and external appointments, and they are important because they ensure the broadest possible range of expertise and knowledge is there, both, essentially, from within the bank but also from within industry. The third element, of course, is the Treasury observer, and that’s a very important role, because what it ensures is that there is a real connection between Treasury and the Reserve Bank, and I understand that already the Reserve Bank has been inviting senior Treasury officials to meetings. So this, again, enables better coordination between Reserve Bank policy against a background of Government policy.

This monetary policy committee absolutely needs to be operationally independent, but, at the same time, it needs to be democratically legitimate, and that is why the Minister of Finance has the ability and the power to make appointments to that monetary policy—[Interruption]

💬 SPEAKER: Order! Order! Can I ask Ministers to leave the Chamber or to sit down if they’re going to have conversations. Thank you.

Thank you, sir. That ability of the Minister of Finance to, essentially, veto appointments to the monetary policy committee ensures that we strike an appropriate balance between operational independence and important democratic legitimacy.

It’s also important to recognise that this is a committee that is intended to make collaborative decisions, a committee of equals and not a hierarchical committee, and that’s why it would be inappropriate for the Governor of the Reserve Bank to be making those appointments. So that is broad-based decision making.

The second thread that I’d like to talk about is the increased transparency of the conduct of the Reserve Bank. A critical document will be the charter of the Reserve Bank: a document which will, essentially, set the direction in the operations of the bank and the monetary policy committee, and it is a document which must be consulted on—again, ensuring that there is democratic legitimacy in this very important, if technical, area of policy making.

Then we have the remit, which is, essentially, the direction set by the Minister of Finance for the bank. That remit must be set with the advice of the Reserve Bank, and the Reserve Bank must, in turn, consult on it. So we are moving from a situation where what the Reserve Bank does is, essentially, a mystery. It is done in the confines of the bank and all we get are the monetary policy statements and other statements, and no one’s quite sure how we got there. We’re moving into a situation where the machinery of the bank is there in the light of day for everyone to see.

Lastly, that charter will allow the bank to disclose its meetings and procedures. Exactly how that will be done is going to be left for the development in the charter, but what it does mean is that the way the decisions are made—the minutes of meetings and so on—will be able to be put out into the public domain so that people can gain an understanding of what goes on in these monetary policy committee meetings.

So what we have really is a set of tools which is both ensuring we have an independent, robust Reserve Bank, with the best possible expertise having input into those meetings, and also a system of democratic checks, consultation, and appointments, which ensures this organisation has the legitimacy to make the important decisions it will be making. For that reason, I commend the bill to the House.

Thank you, Mr Speaker. Well, the previous contributor, Duncan Webb, talked about democratic legitimacy, democratically enabling the Minister to appoint his favourite buddies to this committee. I would call it political interference. It takes away the independence that exists in the Reserve Bank of New Zealand (RBNZ) today. And it’s interesting when this previous contributor talked about independence. He says, “It is independent, but”—“It is independent, but”—and that only means that the independence is gone and that it is the democratic legitimacy, according to his words, that enables the Minister to appoint his or her people on that committee.

This bill is redundant. It is a total waste of the House’s time. It demonstrates, once again, the sanctimonious attitude that comes from that side of the House. They’ve got nothing better to do than make up rules that are just quite unnecessary. The wheel is spinning just fine. The targets for the RBNZ are set and there is absolutely no need to interfere, interrupt, confuse, and cause conflict by setting an employment target or a full employment target. What does that mean, in any case? What does full employment mean? Does it mean 69 percent, 70 percent, or 71 percent worker participation? We thought we had full employment last year, but employment continues to rise. So what is full employment?

The Government’s sanctimonious attitude is already demonstrated by bringing in legislation again, prior to today, where it is not necessary, and the consequence of doing it has other repercussions—unintended consequences, in other words. I’m not going to go into any depth, but I can talk about the removing of the tenancy fees. That was brought up in question time today: the unintended consequences—or the pretty foreseeable consequences of that.

💬 SPEAKER: Order! Back to the bill, thank you.

Sure. And, of course, in this way, this employment target is like picking a winner. It’s highlighted—to us, at least—the priority that the Government has around employment. But that is not necessarily what we need to have a stable and enduring and growing economy. At the end of the day, we want people’s standards of living to rise day after day after day. A certain level of employment is not necessary for that to occur.

The Governor of the Reserve Bank already has a tough job of targeting inflation and has a price stability concern. We’ve seen that in the last—well, in the last Parliament I was on the Finance and Expenditure Committee and we had the Governor of the Reserve Bank reporting in regularly about those two things, and they, at the time, had a difficult situation.

We had a raging asset price increase in housing, but, at the same time, we had a very soft and falling inflation rate. In fact, the predicted inflation rate was continually supposed to rise on the back of cuts and on the back of reduced immigration, but it didn’t happen. But the asset prices continued, and so we can see the difficult situation the RBNZ was in. Should they cut interest rates further to kickstart inflation, only to stimulate further the asset price bubble that was in the Auckland housing market? So already the governor has a very difficult job in balancing those two things: inflation and price stability. Putting another spanner in the works, if you like, is just going to make the job more difficult.

Employment is not influenced to any real degree by interest rates. Employment is all about enabling the employer to employ the next person. The employers employ employees. It’s not the RBNZ; it’s the marketplace. And it’s for this House to set in place structures to enable it to be easy for an employer to employ the next person. Interest rates are almost irrelevant. It’s to do with labour laws. It’s to do with 90-day trials. It’s to do with the ability of employers to take on part-timers or full-timers.

💬 Hon Chris Hipkins: Cost of capital.

Cost of capital is—what’s your point Mr—

💬 Mark Patterson: The exchange rate. We’re an exporting country.

That’s right. All those things—exactly. I’ll agree with that member. I’ll agree with that New Zealand First member. It is not just interest rates that affect employment. So are we going to go for a fixed exchange rate to satisfy the whim or the demands of New Zealand First, for example, because that is part of their policy? But, again, imagine trying to juggle all those balls in the air. So the point here is that putting employment as a target is only going to create conflicts. So other than all those other things, the stability, and the policy that the Government sets, that is what is going to drive employment up or unemployment down, whichever way you want to talk about it.

I know it is difficult and it’s always a difficult decision to employ another person. I have my own small business and it is always a concern, because one must take on the responsibility of an employer when taking on the next person; to be sure that their business will continue to grow, to be sure with a reasonable degree of certainty that the economy will perform as you hope and expect. These things are not related to interest rates. So putting in a target for the RBNZ—and they can, obviously, influence interest rates—just confuses the situation that they find themselves in. For example, we have a situation right now where we have high employment. We have high employment, and we have high asset prices, but inflation continues to be low.

Imported inflation—that is, the inflation that is caused by the strength of our currency, as mentioned; the cheapness of the goods that are brought in from offshore; the price of petrol—continues to drive down our headline inflation, our Consumers Price Index. So what is the Governor of the Reserve Bank to do about that? Should he or she cut interest rates to focus on the inflation aspect but knowing that employment is already very high and asset prices are very high?

And so the obvious can occur. We could have imported inflation where oil prices are high, costs are going up, inflation is at 4, 5, 6 percent, but we could still have a low employment rate. We could still have a sloppy asset price market. So should we be cutting rates or increasing rates? And so that is the conflict that this Reserve Bank has already got in the two targets that it has set, but now with a third, it is just going to be making things much more difficult.

I have talked very briefly about the independence of the RBNZ and the importance that the perceived independence of the RBNZ remains. Perception is reality. So by allowing the Minister of Finance to cut across the independence of the RBNZ governors for the purpose of democratic accountability—apparently, according to the previous speaker, Duncan Webb—just removes some of that independence. It increases the perception of political interference, and that is not a good thing. The RBNZ wheel is spinning. It ain’t broken. Why are we trying to fix it? It has done an excellent job of maintaining inflation at its target level. It continues to do so.

I see no reason to create an issue where there will be debate about the importance of interest rates compared to employment, compared to asset prices, and it’s completely unnecessary—remembering, of course, the point I started with at the beginning; that the interest rates can be set by the RBNZ, but the RBNZ is not the person or the entity that determines the level of employment. It is the marketplace and it is the employer that determines the level of employment.

Thank you, Mr Speaker. “It ain’t broken. Why are we trying to fix it?” Those are the exact words from Mr Alastair Scott, to help out our Hansard clerks there. It ain’t broken. Why are we trying to fix it? You know what, Mr Speaker? I agree that the inflation targeting, the general policy targets agreement of the Reserve Bank, isn’t necessarily broken, but it can be made better. We can do better. That is what this bill is attempting to do.

Listening to the speeches, in particular from the Opposition benches, what I have been struck by is the fear of change—the fear that we might try anything different, the fear that moving away from one target for the Reserve Bank might be somehow an irremediable step into some disastrous economic disaster, I suppose. But let me reassure the members of the Opposition. This is a sensible and incremental change that is being made to the Reserve Bank and it’s one that as a conservative party they ought to embrace. The nature of conservatism is not about no change whatsoever. The nature of conservatism is not simply about some idealised, very old-fashioned morality. The real nature of conservatism—the conservatism that comes to us from Edmund Burke—is about making change, and not change based on some ideology but change based on experience; piecemeal pragmatic reform informed by the experience of those who are able to see what is happening and to think of what could be done a little bit better. And that is what this particular bill is about.

So, rather than having this overwhelming call from the Opposition of, “It ain’t broke so don’t fix it.”, let me show you why we do actually need some change. Now, I agree that back when the Reserve Bank of New Zealand Act was first introduced we did need some serious work on inflation. I recall back in those days, as my husband and I bought our first home together, paying 20 percent interest rates. Inflation was out of control. I recall my mother talking about when she went to the supermarket she almost couldn’t keep track of what our ordinary consumer items ought to cost, because the prices changed so frequently. I mean, compare that to today. When we walk into the supermarket we know that a couple of litres of milk will cost about $4, a loaf of bread will cost about $3, a can of tomatoes about a $1.30, a pack of 32 tampons about $8. Those prices are predictable because we do have inflation under control, and it was totally out of control in the 1980s. So it was a good move to introduce the inflation targeting, but there were some costs that went along with it.

I asked the library to find some data for me—not just hand-waving but actual data of what happened to inflation rates and what happened to unemployment rates. So in the years between September 1995 and about September 2002, inflation went—it was around about 3.5 percent, then 2.4 percent, 1 percent, 1.7 percent in September 1998. This is the year to September 1998. It was negative 0.5 to September 1999, 3 percent in the year 2000, 2.4 percent, 2.6 percent. Inflation did indeed get under control, but what was happening to unemployment at that time? In the September quarter of 1995, unemployment was 6.2 percent. The previous year, September 1994, it had been 8 percent, September 1996 it was 6.5 percent, September 1997 it was 7 percent, 7.7 percent the year after, and on it goes. It got down to 5.5 percent by September 2002.

And what does that mean? That means people without jobs. That means people without a standing place in their communities. That means people who are disenfranchised. They are unattached to work, to places of employment. We know that having employment gives people a sense of place, a sense of standing, a sense that they have real standing as a person. It is a way of enabling citizenship—ensuring that people have meaningful work—and when unemployment is rising and is high we are disenfranchising our citizens. That is the problem that we face alongside inflation, and that is the problem that we are now trying to fix—just a bit.

This is not revolutionary change. We are not asking the Reserve Bank Governor and the committee there to do anything outrageous. For many years now, they have been considering employment and unemployment as they set the interest rates. They’ve been doing it as part of the interest rate discussion. What this new legislation does is bring that employment target right into the forefront of their thinking. So this is not a revolutionary change; it is an evolution. It is a small incremental change based on experience; exactly the sort of change that a conservative party ought to embrace, and I do not understand why the Opposition do not see its merits and its worth.

I want to raise one final point and I’m going to take this from something that Alastair Scott just said. He said, “We want people’s living standards to rise.” and indeed we all want to do that. But then he said, “A certain level of employment is not necessary for that to occur.” What an absurd thing to say. We know that employment matters to people. We know that employment makes a difference to people’s lives. He carried on to talk about making it easier for employers, to talk about employment as something to do with the market, and to ask the questions around, really, employment and labourers as a commodity to be supplied.

And, in fact, these are often the questions that are asked in economics. Is there a sufficient labour force? Do we have enough workers? Is the price for labour right? I say to you that we must turn those questions around the other way. The question is not: should people serve the economy as a labour force? But the economy should serve the people and the question we must ask all the time is: is the economy supplying enough jobs? Is there enough employment for all the people who want to work? Are we putting people front and centre of our decision making? And that is precisely what this amendment to the Reserve Bank of New Zealand Act does: it puts people front and centre. It says that employment matters. It says that we must consider the effect on people—not just on GDP, not just on interest rates, not just on all those technical things. Those are all important, and people are important too. That is the importance of this legislation. It is saying that whenever we make decisions about our economy, what matters most is the people.

That is why I support this bill. It is not wild, radical change, after all. Those radical, revolutionary countries—the United States and Australia—also have a dual mandate legislated for their central banks. This is not unprecedented change. It is small, piecemeal change based on experience, and it is change that puts people first. That is why I support this bill.

The question was put that the amendments recommended by the Finance and Expenditure Committee by majority be agreed to.