(Bloomberg) -- Stripping New Zealand’s central bank of its dual mandate and returning it to a single focus on price stability may improve its effectiveness by influencing inflation expectations, the Treasury Department said.
A single mandate will mitigate the risk that the Reserve Bank’s consideration of employment “contributes to higher-than-otherwise inflation,” Treasury says in a regulatory impact statement published Monday in Wellington. “Perhaps more importantly, it may influence perceptions of the Reserve Bank’s willingness to take action — which may itself support the achievement and maintenance of price stability,” it says.
New Zealand’s new government plans return the RBNZ to a sole inflation goal, arguing the dual mandate has muddied the waters at a time when the bank needs to be ruthlessly focused on battling a cost-of-living crisis. Inflation is currently running at 5.6% and has been above the central bank’s 1-3% target band since early 2021.
While the RBNZ has said its inflation and employment objectives have never been in conflict, it favors elevating price stability over maximum sustainable employment — a nebulous goal with no defined value — because it will make its communication job easier.
Treasury said the dual mandate affects not only the policy decisions made by the Monetary Policy Committee, “but also perceptions of the effectiveness of monetary policy.”
“Expectations can have a significant impact on inflation outcomes,” it said, adding that when the dual mandate was introduced in 2018 it noted the risk that market participants interpret the RBNZ’s new employment objective “as weakening its focus on inflation.”
Treasury also advises the government that restoring the RBNZ’s single mandate can be done by altering its policy remit, and that changing the legislation itself is unnecessary.
However, “the government has committed to introduce legislation to remove the dual mandate; specifically, to remove the economic objective to support maximum sustainable employment,” it says in the regulatory impact statement.
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