A collegial relationship between Treasury and the Reserve Bank is a good thing in principle. Monetary and fiscal policy remain the most important levers of economic policy, and the two institutions in charge of those levers need to exchange their views.
While it is propitious when two important branches of government work well together, it can be problematic if one of them then monitors the other.
Treasury and the Reserve Bank are jointly reviewing the Reserve Bank Act. Both organisations are represented by their staff in this review.
The two organisations are already so closely cooperating that the review staff even have business cards with both logos. Their addresses are similar anyway: No. 1 and No. 2 The Terrace, Wellington, respectively.
The institutional links between the two bodies go deeper. When the Reserve Bank established a Monetary Policy Committee, the previous Treasury Secretary took a seat at the table as an observer.
The Reserve Bank Act review, however, now proposes to make Treasury the monitoring agent of the Reserve Bank and ensure it is “effective, efficient, and accountable” on behalf of the Minister of Finance.
An alternative proposal would have been to create a supervisory council as an independent agent of the Minister. However, that was regarded as more expensive and less consistent with the new Board governance model for the Reserve Bank.
Still, given the past and current closeness of Treasury and the Reserve Bank, should not a monitoring agent be more removed from the object it is supervising?
To a degree, this is not just a Treasury and Reserve Bank problem. It is a New Zealand or a Wellington problem. New Zealand is famous for its two degrees of separation; in the capital, it is usually less than that.
So here is an idea: Since the Australians are also looking at better ways to monitor their regulators following the Hayne review, why not have a Trans-Tasman supervisory agency? Having a few friendly foreigners in the team might work well on both sides of the Tasman.
Something for the two governments to discuss at the next CER talks.