New Zealand steps up scrutiny of RBNZ after inflation misses

by NZ Adviser20 Apr 2016
(Bloomberg) -- New Zealand Finance Minister Bill English is stepping up his oversight of the central bank, documents obtained under the Official Information Act show.

English has for the first time written a “letter of expectations” to the Reserve Bank’s board, whose job it is to monitor the RBNZ’s conduct, documents obtained by Bloomberg show. In the November letter, English sets out his “specific interests” for the board’s monitoring role, and says he expects to discuss its “assessment of the Governor’s performance from time to time.”

The move comes as Governor Graeme Wheeler, who is solely responsible for interest-rate decisions, struggles to return inflation to the midpoint of his 1-3 percent target band and faces criticism for his communication. There is nothing in the documents to suggest that English’s request for more information from the RBNZ board relates to any concerns about the independent central bank.

English sends letters of expectations to the boards of other state entities and this move brings the RBNZ into line with that practice, a spokesman for English said. The minister was unavailable to comment, he said.

An RBNZ spokesman declined to comment and said it was a matter for the board. RBNZ Board Chairman Rod Carr wasn’t immediately available.

More Meetings
English already writes an annual letter of expectations to Wheeler. His first letter of expectations to the board was sent in mid November, English’s spokesman said.

The final draft, obtained by Bloomberg, seeks to clarify English’s expectations of the board and asks it for six-monthly, rather than annual, meetings with him to discuss the bank’s performance.

English also states he wants to discuss the board’s assessment of the governor’s performance, and that he doesn’t want its communications limited to the narrow criteria set out in the Reserve Bank Act.

Under New Zealand legislation, the Finance Minister signs a Policy Targets Agreement, known as the PTA, and agrees an inflation target with the governor. The board has a monitoring role, which includes reviewing the advice given to the governor for rate decisions after the fact.

Wheeler has faced criticism after raising rates in 2014 only to reverse course and cut them last year as his inflation forecasts failed to materialize. Inflation has been below the midpoint of the 1-3 percent target range since his appointment in late 2012. Consumer prices rose 0.4 percent in the year through March.

English Criticism
In June last year, English said Wheeler needed to get inflation back to target and raised questions about how closely the PTA was being followed. Later in the year, English said that raising rates too high in 2014 helped contribute to New Zealand’s slower growth.

The board hasn’t publicly raised any concerns about Wheeler’s performance, according to its statements in the RBNZ’s annual reports, saying he has met the requirements of the PTA.

In the letter, English says he wants the board “to provide me with a clear sense of its judgments and the basis for them in assessing performance in meeting the PTA, recognizing that the policy targets have evolved to be flexible and forward looking.”

RBNZ Relationships
He also wants the board to assess how the bank maintains a sound and efficient financial system and how it develops regulatory policy. He expects the board to keep under review how the RBNZ’s relationships with him, the Treasury and other agencies are operating.

English proposed the enhanced level of oversight at a meeting with Wheeler, Carr and Treasury Secretary Gabriel Makhlouf on July 22 last year, according to a Treasury briefing document prepared for the meeting.

The document notes that the board’s 2014 report contains “no specific discussion of the governor’s performance.” It recommends “establishing greater clarity about your expectations for the board’s role” and proposes the drafting of a letter of expectations.

Some sections of the documents have been withheld.

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