Changing the way interest rates are set could harm the economy, according to former top central bankers.
Finance Minister Grant Robertson and RBNZ governor designate Adrian Orr sign a new policy agreement. Photo: RNZ
Finance Minister Grant Robertson and incoming Reserve Bank governor Adrian Orr will sign the Policy Targets Agreement (PTA) at 9am, adding full employment to its low inflation target.
"The route we're going down is a disastrous route," former Reserve Bank chair Arthur Grimes said.
"Having multiple targets like that can destabilise the economy over a number of years. It's really a crazy policy."
With the government also currently reviewing the Reserve Bank Act, analysts are unsure how much change there will be in the wording of the PTA this time round. But an employment objective will be included this year.
But Dr Grimes is adamant a dual target has created instability in another country that uses it, the United States.
"Almost every episode of financial instability in the world has come out of the US, and a lot of that is sheeted home to their dual targeting system."
Former Reserve Bank governor Don Brash also argues it would be a mistake.
Dr Brash said two policy objectives such as low inflation and full employment required two policy instruments to deal with them.
"If there was a serious divergence with unemployment going up, and inflation going up quite strongly as well, the Reserve Bank would be a situation of having to choose between following one objective or the other.
"And that's where life would get tricky for them," Dr Brash said.
In contrast, BERL chief economist Ganesh Nana favoured a broader mandate.
Dr Nana said it indicated a change in mindset away from focusing on just inflation to help improve the economy, which mirrored Treasury's current work on living standards and measuring how well-off New Zealand really was.
"We are looking at broader objectives rather than the old fashion model that some economists cling to that as long as you've got GDP growth and you've got a central bank looking after inflation then everything else will fall into place, and the benefits will trickle down to everybody.
"That model is broken and it is an old way of thinking," Dr Nana said.
Employers and Manufacturers Association chief executive Kim Campbell is non-plussed by the change.
"I don't think it's going to make any difference at all.
"In some respects if they have to consider employment, they have to consider the business environment and that'll be good for business," Mr Campbell said.
The signing of the PTA is not the only item on today's agenda.
The results of phase one of the review of the Reserve Bank Act, including an overview of the new decision-making structure at the bank, will also be unveiled.
Mr Orr officially starts in the role as Reserve Bank governor tomorrow.
