Graeme Wheeler was recently appointed Governor of the Reserve Bank of New Zealand starting September 2012 for a five-year term. In the lead up to the appointment, the usual debates over the role of the central bank have resurfaced.

Briefly summarised, the popular view is that the Reserve Bank should operate under a wider remit than just targeting inflation. There are also suggestions that the Governor should be part of an Official Cash Rate (OCR) committee or involved in other areas of economic policy.

All these ideas have fatal flaws.

First, the goal of maintaining price stability is mutually exclusive to the other goals the government of the day might have. Rampant economic growth can be incompatible with price stability, as can trying to ‘support’ exporters through monetary settings. The goal of promoting full employment is also often at odds with sound monetary policy, and in any case, there is little the central bank can do about it. In short, inflation targeting must work independently of the government’s economic priorities. While it is true that Australia does have broader goals written into its equivalent of the Policy Targets Agreement, those goals are a dead letter.

The Governor sitting on a committee of the great and the good to decide the official cash rate is also a flawed concept. The current role of the Governor is both sufficient and efficient. As it stands, the Governor makes decisions based on advice from the bank and stands by those decisions. Introducing an opaque committee structure such as prevails in Australia would reduce transparency and accountability, and ultimately, leave the public wondering about what the Governor does. It would also reopen the bank to politicisation through the committee appointment process.

The same applies to the Governor being involved in other areas of economic policy. Rightly or wrongly, economic policy is intimately tied up with the political process. The Governor being involved more broadly in economic policy would ultimately undermine the standing of the bank as an independent institution, with the goal of stable prices.

The Reserve Bank has been a valuable institution since its reformation in 1989, and continued use of a tight policy targets agreement is the right policy for New Zealand.

In the meantime, The New Zealand Initiative congratulates Mr Wheeler on his appointment and wishes him well in this important role.