The Reserve Bank of New Zealand and the Price Stability ACT

The Governor of the Reserve Bank of NZ has been re-appointed for another term recently despite the fact that inflation has exceeded the target (between 1 and 3 percent) since June 2021. The average from June 2021 to Sep 2022 is 5.9 percent. The Price Stability ACT, however, is clear where the buck stops. James Graham and Christie Smith (2012, p. 35) say, "The Act also sharpens the personal accountability and responsibility of the Governor of the Reserve Bank: “it is the duty of the Governor to ensure that the actions of the Bank in implementing monetary policy are consistent with the policy targets fixed under section 9 of this Act” (1989, s11). The Governor can be removed if, among other things, the Governor’s performance in pursuing the specific policy targets has been inadequate (1989, s49). Under this Act, the Board’s role is primarily to act as agent of the Minister of Finance in monitoring the Governor’s performance," [ Reserve Bank of New Zealand: Bulletin, Vol. 75, No. 1, March 2012]. That said, the target has been missed more often from 1990 to Sep 2022. CPI inflation averaged 5.3 percent (Mar 1990 - Jun 1991), 3.8 percent (Mar 95 - Dec 95), 3.2 percent (Mar 01 - Sep 01), 2.6 Percent (Jun 02 - mar 03), 3 percent (Jun 04 - Mar 2007), 3.7 percent (Dec 07 - Mar 09), 4.6 percent (Dec 10 - Sep 11), and 5.9 Percent (Jun 21 - Sep 22) and counting. One might wonder about accountability! My own view is that the ACT must say something about the nature of the shocks that cause inflation to rise. The RBNZ should provide careful and verifiable technical analysis of its assessment of the shocks when inflation is above the target. When supply shocks are identified to be the dominant, the RBNZ should not be responsible for increasing inflation above the target, and it should not raise the OCR in response. The opposite is true when demand shocks dominate.