Professor Robert MacCulloch: Any cut in the Official Cash Rate by NZ's Reserve Bank today will be Illegal.

When National came to power, the Party amended the Reserve Bank of NZ legislation, which had previously instructed the Bank to pursue the dual objective of low inflation and "maximum sustainable employment". The latter aim allows a central bank to manage how fast the economy is growing, and to influence the unemployment rate, at least in the short term. However, Finance Minister Willis, when she came to power a year ago, removed the ability of the Bank to target the state of the economy, introducing legislation that gave the Reserve Bank the sole mandate of achieving price stability. That has been defined by the government as keeping inflation in a 1-3% bracket - so preferably close to 2%. Willis, who introduced the law, said removing the dual mandate was a “highly symbolic, important act”.

What is inflation currently in NZ? Its at 2% and so on target. Yet the Big Monopoly Banks, financial media & monetary "experts" are telling us the RBNZ will - and should - cut the OCR by 50 basis points today - maybe more. Why? Because, they say, the economy has stagnated and that's bad for business - bad for them - and unemployment is rising. For example, Kiwibank's economist Mary Jo Vergara said the economy needed rate relief urgently - she says, "Interest rates are .. too restrictive .. There's no need for this sort of choke hold to be on economic growth anymore. We need that rate relief." That may be so - but what she is asking for - namely rate cuts to get the economy growing - has been ruled out explicitly by law in NZ. Finance Minister Willis has made it strictly illegal for that reason to be used to justify rate cuts. Inflation is already squarely on target. There's no legal basis for cutting the OCR, given the sole mandate of price stability that the RBNZ was given by our Government. The question is - will the RBNZ break the law today?

Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.