RBNZ can’t influence job trends: McDermott

for column1The Reserve Bank of New Zealand may now need to give regard to employment when setting monetary policy but in reality its ability to influence trends in the jobs market is limited, says Reserve Bank assistant governor John McDermott.

Last month Finance Minister Grant Robertson and new governor Adrian Orr signed a new policy targets agreement (PTA) that adds the goal of “supporting maximum levels of sustainable employment within the economy” to the existing goal of price stability, and the government announced a switch to decisions by committee.

In a speech delivered for Mr McDermott in Sydney on Thursday, he said the employment mandate would “reinforce the flexibility of inflation targeting” because the bank already assessed employment in judging the impact of policy on the economy.

Monetary policy had become increasingly flexible as it has evolved since the Reserve Bank Act (1989) and that meant “we have long had regard to the real economy, including employment,” he said in a speech to a Reserve Bank of Australia conference, titled: Inflation targeting in New Zealand: an experience in evolution.

While the PTA has been signed, the exact wording of the full employment objective in the Act is yet to be determined.

“Just as with inflation, our understanding of the labour market can always be improved as we are faced with new data, new developments, and as new research methods become available,” he said.

Still, “there are widely-recognised limits to what monetary policy can do over the long run. We have some influence over the degree to which the unemployment rate, as just one example, deviates from its underlying trend”.

Mr McDermott said that “ultimately that underlying trend is determined by factors outside of our ability to influence, that rely instead upon the age and skills of the population, the efficiency with which jobs are matched to available workers, and the nature of employment regulation.”

Under the government’s planned changes to monetary policy processes, a charter will be agreed between Mr Robertson and the yet-to-be-formed new monetary policy committee (MPC) within the bank.


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