While I don’t think it is usually particularly wise, in general I don’t have a problem if the Prime Minister or Minister of Finance want to comment critically on particular OCR decisions or on the MPC’s handling of monetary policy. We give operational independence to the MPC for good (if arguable) reasons, but they aren’t a separate arm of government – so it is different than ministers criticising judges – and they are human and, as we’ve seen again in the last five years, they make mistakes, sometimes bad and very costly ones. The MPC is supposed to be accountable and ministers are our representatives and the ultimate vehicle for the exercise of that accountability. Back when core inflation was persistently undershooting the target last decade, ministers were eventually heard to grumble in public from time to time even about that poor performance.
It is another matter to be holding private meetings with the Governor (or other MPC members) and expressing your views – whether as PM or Minister of Finance – perhaps especially in the days immediately leading up to a particular interest rate decision. There is no public visibility – or, thus, accountability – for those comments, and Luxon was very unwise to have done what he said he did. That is particularly so at present when a) the Governor is on a short-term temporary contract and is bidding to be made the permanent Governor, and b) when things around the Reserve Bank have been so tangled and murky all year (and when, despite attempts to deny it, it seems clear that the capital settings review was mainly driven by pressure from the Minister of Finance). This is a time when people should be bending over backwards to ensure that they are behaving with propriety, and that there can be no question (or appearances) of anything else. I don’t really suppose that in his meeting the PM thought he would influence the MPC – maybe he was simply sounding off without thinking too hard – but those of a suspicious mind might reasonably worry that it was otherwise. Of course, in law the government cannot direct a particular OCR decision, and the Governor himself has only one of six votes on the MPC (and three other votes are held by externals who owe no particular deference to him).
It seems that these conversations occurred at a meeting that, in one form or another, has happened for decades in the day or two prior to each Monetary Policy Statement. I’ve been out of the Bank for 10 years now but my impression is that things are not very different now than they were in my day. The practice would be that at the end of the “forecast week”, when the Bank’s or MPC’s economic view had crystallised, the material from that forecast process would be used to prepare a short note for the Minister and Prime Minister. In my day, Treasury drew on Bank material to prepare that note, which included possible angles for questions that ministers might use to ask the Bank. But that note never touched on the OCR itself, and neither did the discussion in the meeting that followed (usually involving the PM, MoF, the Governor and chief economist, perhaps someone from Treasury, and perhaps some ministerial advisers). In all my years in the Bank I often heard reports back from these meetings, from the Governor or chief economist, and it was clear that boundaries were pretty consistently respected. What the Bank might do with the OCR was pretty much out of bounds (and in my day, OCR decisions were – formally – purely those of the Governor himself).
If the structure has remained much the same – and I gather the meeting in question happened last Tuesday – there is nothing very wrong with that model, except that the Prime Minister appears to have crossed the line, in ways that probably should prompt a rethink as to whether such meetings prior to the MPS are still appropriate. A model can have been around for decades, and appear to have worked okay, with people respecting conventions, but sometimes particular episodes prompt an overdue rethink. It was like that with the lock-ups the Bank used to hold for analysts and media immediately prior to MPS releases – which seemed to work okay until it became clear that security settings were weak and one media outlet was actually passing information from the lockup back to their office (something I got caught up in when their office passed information on to me, since I was due to be interviewed by them on the MPS later that morning). There are no more lockups (and nor should there be).
Should the Governor and an acolyte or two really be meeting with the Prime Minister and Minister of Finance immediately prior to MPS/OCR decisions? It may have worked fine for a long time, but it isn’t a good look, and on this occasion the PM has crossed the boundary, and it is hard to restore confidence now that the meetings are widely known of, and the PM has done what he says he did. There is no particularly compelling reason for the meeting. The Treasury has a non-voting observer on the MPC, and if there is any case for a briefing on the economic outlook before the release surely that person could arrange for the briefing. But it isn’t really clear that such a prior briefing is needed at all (and it has always been rather artificial for the Bank to be discussing the economic and inflation outlook without also discussing the monetary policy calls). Moreover, it isn’t the days of the single decisionmaker, and external MPC members in particular might reasonably think that it is time to rethink the approach (not just while the appointment of a new Governor is dragged out – will be six months next week since Orr left – but in the future more permanent state with a new longer-term Governor). Were I in Hawkesby’s shoes, I’d be thinking pretty hard about the risks and returns to those meetings anyway. There is plenty of time after releases and well clear of the next decisions to maintain Beehive relationships, to the extent they are needed on monetary policy matters.
It is another matter to be holding private meetings with the Governor (or other MPC members) and expressing your views – whether as PM or Minister of Finance – perhaps especially in the days immediately leading up to a particular interest rate decision. There is no public visibility – or, thus, accountability – for those comments, and Luxon was very unwise to have done what he said he did. That is particularly so at present when a) the Governor is on a short-term temporary contract and is bidding to be made the permanent Governor, and b) when things around the Reserve Bank have been so tangled and murky all year (and when, despite attempts to deny it, it seems clear that the capital settings review was mainly driven by pressure from the Minister of Finance). This is a time when people should be bending over backwards to ensure that they are behaving with propriety, and that there can be no question (or appearances) of anything else. I don’t really suppose that in his meeting the PM thought he would influence the MPC – maybe he was simply sounding off without thinking too hard – but those of a suspicious mind might reasonably worry that it was otherwise. Of course, in law the government cannot direct a particular OCR decision, and the Governor himself has only one of six votes on the MPC (and three other votes are held by externals who owe no particular deference to him).
It seems that these conversations occurred at a meeting that, in one form or another, has happened for decades in the day or two prior to each Monetary Policy Statement. I’ve been out of the Bank for 10 years now but my impression is that things are not very different now than they were in my day. The practice would be that at the end of the “forecast week”, when the Bank’s or MPC’s economic view had crystallised, the material from that forecast process would be used to prepare a short note for the Minister and Prime Minister. In my day, Treasury drew on Bank material to prepare that note, which included possible angles for questions that ministers might use to ask the Bank. But that note never touched on the OCR itself, and neither did the discussion in the meeting that followed (usually involving the PM, MoF, the Governor and chief economist, perhaps someone from Treasury, and perhaps some ministerial advisers). In all my years in the Bank I often heard reports back from these meetings, from the Governor or chief economist, and it was clear that boundaries were pretty consistently respected. What the Bank might do with the OCR was pretty much out of bounds (and in my day, OCR decisions were – formally – purely those of the Governor himself).
If the structure has remained much the same – and I gather the meeting in question happened last Tuesday – there is nothing very wrong with that model, except that the Prime Minister appears to have crossed the line, in ways that probably should prompt a rethink as to whether such meetings prior to the MPS are still appropriate. A model can have been around for decades, and appear to have worked okay, with people respecting conventions, but sometimes particular episodes prompt an overdue rethink. It was like that with the lock-ups the Bank used to hold for analysts and media immediately prior to MPS releases – which seemed to work okay until it became clear that security settings were weak and one media outlet was actually passing information from the lockup back to their office (something I got caught up in when their office passed information on to me, since I was due to be interviewed by them on the MPS later that morning). There are no more lockups (and nor should there be).
Should the Governor and an acolyte or two really be meeting with the Prime Minister and Minister of Finance immediately prior to MPS/OCR decisions? It may have worked fine for a long time, but it isn’t a good look, and on this occasion the PM has crossed the boundary, and it is hard to restore confidence now that the meetings are widely known of, and the PM has done what he says he did. There is no particularly compelling reason for the meeting. The Treasury has a non-voting observer on the MPC, and if there is any case for a briefing on the economic outlook before the release surely that person could arrange for the briefing. But it isn’t really clear that such a prior briefing is needed at all (and it has always been rather artificial for the Bank to be discussing the economic and inflation outlook without also discussing the monetary policy calls). Moreover, it isn’t the days of the single decisionmaker, and external MPC members in particular might reasonably think that it is time to rethink the approach (not just while the appointment of a new Governor is dragged out – will be six months next week since Orr left – but in the future more permanent state with a new longer-term Governor). Were I in Hawkesby’s shoes, I’d be thinking pretty hard about the risks and returns to those meetings anyway. There is plenty of time after releases and well clear of the next decisions to maintain Beehive relationships, to the extent they are needed on monetary policy matters.
Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.
2 comments:
Another sign of Luxon’s naïveté perhaps?!
Or perhaps Luxon's genius.
The RB governor needs information to make his decision.
Luxon can provide a wealth of government spending information and government spending is the biggest show in town.
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