The Reserve Bank has been issued a new set of riding instructions, including maximising employment, and is also to get a new structure to set interest rates.
Photo: RNZ
Finance Minister Grant Robertson and the incoming governor of Reserve Bank of New Zealand (RBNZ) Adrian Orr have signed a new policy targets agreement this morning which brings in the employment mandate.
RBNZ will now be required to help maximise sustainable employment as well as try to keep inflation near 2 percent.
It's the first significant change to the bank's riding instructions in nearly 30 years and was well-signalled by Labour before the election.
Mr 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 New Zealand law by adding employment outcomes alongside price stability as a dual mandate for the Reserve Bank."
Finance Minister Grant Robertson and RBNZ governor designate Adrian Orr sign a new policy agreement. Photo: RNZ / Gyles Beckford
Central banks in the United States, Norway and Australia all have similar mandates.
Mr 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.
Former Reserve Bank chair Arthur Grimes said the new policy was "crazy" and would destabilise the economy.
Ex-Reserve Bank governor Don Brash said the changes were a mistake, but Business and Economic Research Limited chief economist Ganesh Nana is in favour of the broader mandate.
Finance Minister Grant Robertson and RBNZ governor designate Adrian Orr Photo: RNZ
Federated Farmers has also criticised the move saying the government ran the risk of high inflation.
The Federated Farmers' vice president, Andrew Hoggard, said the risk was the central bank was pulled in too many different directions, and allowed inflation to get out of control.
"I remember growing up as a kid during the eighties and my parents enduring high inflation, that was bloody tough times, high inflation, high interest rates ... you know New Zealand's been a very stable country over the years since 1989 with the Reserve Bank Act."
New structure
The bank's legislation is 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.
An internal RBNZ committee already exists to set interest rates, and the changes mirror those in practice in central banks around the world.
"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," Mr 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.
"The announced changes are largely about bringing the legislation into line with existing flexible inflation targeting practices. Focus on the 2 percent mid-point of the target band has been maintained. We see few implications for the monetary policy outlook."
The RBNZ has held its official cash rate at a record low 1.75 percent since the beginning of last year and most expectations are that it will stay at that level until the middle of next year at the earliest.
