RBNZ Made Renewed Bid to Block Treasury From Rates, Emails Show

(Bloomberg) -- New Zealand’s central bank made a renewed bid to keep a Treasury Department official away from interest-rate decisions, citing concerns about the confidentiality of market-sensitive information.

The Reserve Bank had already opposed the government’s plan to add a non-voting Treasury official to its new Monetary Policy Committee, which is due to begin next year. Having lost that battle, the RBNZ in April then floated the idea that the official should leave policy meetings before decisions are made, emails released to Bloomberg under the Official Information Act show.

The idea failed to gain traction and the bank finally agreed later that month that the observer “may attend, and speak at, any meeting” of the MPC.

While the Bank of England and the Reserve Bank of Australia allow a Treasury representative to attend policy meetings, most central banks considered peers of the RBNZ don’t. One reason is that having a government agent privy to and involved in the central bank’s policy decisions may erode trust in its independence -- a crucial pillar in modern monetary policy that helps to maintain public confidence in the bank’s ability to control inflation.

‘Duty to Inform’

In an email to the Treasury dated April 5, an adviser in the RBNZ’s economics department says one of the bank’s concerns about the Treasury observer is they will have “a duty to inform” the finance minister of key decisions.

“Given the role of the Treasury observer is to facilitate information exchange and policy coordination, they don’t strictly have to attend the actual policy decision meeting itself,” the email says. “Under this option, the Treasury observer would be invited to attend forecast meetings and answer questions from the MPC, but would then leave the meeting before the MPC actually decides on policy.”

Adding a Treasury official to the RBNZ’s policy committee is just one of a raft of reforms that Finance Minister Grant Robertson is making at the central bank, several of which have raised concerns about the risk of political interference. Under legislation currently going through parliament, the minister will appoint every voting member of the new committee -- four RBNZ policy makers and three external experts -- and set the remit that determines its goals.

Robertson has always maintained that the RBNZ’s independence won’t be compromised. His rationale for appointing a Treasury observer to the committee is that it will enrich Treasury’s advice and support the coordination of monetary and fiscal policy.

BoE Model

“This approach is common in other jurisdictions, such as in the U.K.,” Robertson said yesterday via a spokesman.

However, in advice to the government earlier this year, Treasury identified 13 central banks that operate a policy committee and said only three of them -- the BoE, RBA and Bank of Japan -- include a Treasury official.

An independent panel appointed by Robertson to advise him on the RBNZ reforms also opposed Treasury joining the bank’s policy committee, saying there were better ways to enhance coordination.

Yet the government went ahead with the plan on the recommendation of Robertson and his three associate finance ministers. They include Shane Jones, whose New Zealand First Party, a coalition partner in the government, has long called for radical change at the central bank.

Orr’s Caution

RBNZ Governor Adrian Orr recently stressed the importance of the bank’s independence being upheld as the reform legislation goes through parliament.

“These are really, really important issues” and “you’ve got to be careful and think hard,” he told Radio New Zealand on Sept. 25. “Changing one thing in a very interconnected financial system has implications always somewhere else. A practical example would be operational independence being shifted that would mean that we can no longer keep inflation stable through time.”

Orr declined a request for comment on the emails released to Bloomberg.

Concerns Raised

Some of the RBNZ reforms have been criticized in public submissions to the parliamentary committee examining the legislation.

ASB Bank said it has concerns about the finance minister setting the RBNZ’s remit -- replacing the process of policy targets being mutually agreed by the minister and the governor -- because this “increases the risk that the bank’s policy objectives become influenced by the political climate of the time.”

Allowing the minister to appoint all members of the policy committee also “gives the minister undue influence over the composition of the MPC and risks undermining the operational independence of the bank,” ASB said in its submission.

“Showing operational independence is important,” chief economist Nick Tuffley told the committee on Sept. 19. “If people question the RBNZ’s willingness to adhere to its target, it does throw up costs in terms of higher inflation expectations and potentially higher interest rates.”

The changes are expected to pass into law by April and the new committee could begin deliberations as soon as May.

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