Monetary policy needs public scrutiny

Published in Insights, The New Zealand Initiative’s newsletter, 16 June 2017

Unless you are closely following New Zealand monetary policy, you might have missed a BusinessDesk story last week. The newspaper revealed an astonishing correspondence between Reserve Bank governor Graeme Wheeler and BNZ’s chief executive Anthony Healy.

The exchange had been triggered by a preview of the Reserve Bank’s Monetary Policy Statement, prepared by the BNZ’s chief economist Stephen Toplis. In this briefing, Mr Toplis expressed his views about RBNZ policy which Mr Wheeler read as a personal criticism.

This prompted a letter from the RBNZ to BNZ effectively asking them to rein in Mr Toplis, arguing his commentary was damaging not only to the RBNZ but also to the New Zealand financial market.

It is not obvious that Toplis’ comment amounted to anything but a fair comment on monetary policy. But even to the degree it may have been critical of the RBNZ, this in itself should not be unusual or problematic.

The decisions of central banks are by their nature often subject to disagreements and strong views. In other countries, where decisions on monetary policy are not solely consigned to the person of the central bank governor, such strong disagreements happen within the banks’ respective monetary policy committees, and they are openly reported.

Central banks must be subject to public scrutiny. There may not be quite as many self-styled monetary policy commentators as there are would-be rugby pundits, but there is certainly no shortage of views central banks’ actions. And these debates are important.

Central banks have a crucial role to fulfil in our economies. This role thus deserves public scrutiny and debate. Given the RBNZ’s independence, external commentary on its actions is the most effective check on its operations.

For these reasons, it is not acceptable for the governor of the RBNZ to attempt to stymie such scrutiny. With his complaints about a bank economist, the governor has overstepped his role.

As former RBNZ economist Michael Reddell correctly pointed out, the RBNZ’s dual role as both a monetary policy body and a banking regulator means that the governor’s letter to a bank CEO carries additional weight. It could easily be interpreted as “be careful what you say; don’t upset the central bank”.

So perhaps there is one good thing coming out of this incident. It might trigger a debate on whether RBNZ’s governance arrangements are fit for purpose.