DON BRASH: WHY THE RESERVE BANK SHOULD REMAIN FOCUSED ON INFLATION

As we approach the 2026 election, both Labour and NZ First want to change the Reserve Bank’s monetary policy mandate from its current single focus on the control of inflation to a dual mandate - controlling inflation while also maximising employment.

And to a great many people that sounds like a sensible change.

But it's not.

When the Reserve Bank of New Zealand (1989) Act was passed by Parliament, there was not a single dissenting vote (to be fair, Sir Robert Muldoon was in hospital when the vote was taken). And that law mandated that monetary policy should focus exclusively on what monetary policy can do best, namely controlling inflation. That was despite the fact that central bank law in several other countries, most notably the United States and Australia, gave monetary policy responsibility for both controlling inflation and maximising employment.

There was a good reason for that. By the late 80s it was very largely agreed by economists around the world that while monetary policy does and can control inflation, it does not have any enduring effect on unemployment. Dutch economist Jan Tinbergen, the first to be awarded a Nobel Prize in Economics in 1969, had argued that it is impossible to use a single policy instrument to achieve two different goals. So the Reserve Bank was directed to focus solely on controlling inflation.

But it was always understood that if the economy were hit by some temporary shock, such as happened when the First Gulf War drove up oil prices sharply in the early 90s, monetary policy should "look through" the direct effects of those price increases.

When Labour formed a coalition government with the Alliance in 1999, one of Jim Anderton's requirements was that the whole Reserve Bank framework should be examined by an independent expert. The Government appointed Lars Svensson from Sweden to do such an independent assessment. He spent some months looking at the New Zealand monetary policy framework and concluded that it was international best practice in every respect bar one: he recommended that monetary policy decisions should be made by a monetary policy committee rather than by the single person of the Governor. (Of course, there had always been a monetary policy committee – at least from the time I was appointed Governor in 1988 – and I don’t recall ever making a monetary policy decision which differed from the consensus of that committee, but it had no official status.) He specifically made no recommendation to change the single mandate.

The so-called Policy Targets Agreement that I signed with the Minister of Finance in 1999 directed that I should use monetary policy to avoid undue fluctuations in output and employment but did not change the single mandate to focus monetary policy on inflation.

And in effect that is the mandate which the Reserve Bank used between 1989 and 2018: keep inflation within the Government-mandated target while avoiding undue fluctuations in output and employment, especially those arising from factors outside the influence of monetary policy – such as a sharp change in international oil prices.

But in 2018 the Ardern-Peters Government changed the Reserve Bank's mandate to a so-called dual mandate, making monetary policy responsible for both controlling inflation and maximising employment. They pointed to the mandates within which the Reserve Bank of Australia and the Federal Reserve Board in the United States operated and argued that we should do similarly, conveniently ignoring how much more we have learned about what monetary policy can and cannot do since central bank laws in those countries were passed.

I have no idea whether the change in the Reserve Bank's mandate explains, in part at least, the fact that our inflation rate got very substantially above the inflation rate target in the early 2020s, but the change would certainly not have helped.

Sensibly in my view, the incoming National-led Coalition Government reverted to a single mandate for monetary policy after it assumed office in 2023.

And now we have both the Labour Party and NZ First committed to restoring a dual mandate if they have the opportunity of doing so. To many of the public that seems thoughtful and caring. Who can not be concerned about the current level of unemployment?

Controlling inflation and controlling unemployment will often require monetary policy to move in a similar direction.

When unemployment is high, the chances are that inflation will be pushing towards the bottom of the inflation range which the Reserve Bank has been directed to achieve. In these circumstances, keeping inflation within the mandated range and reducing unemployment will require a similar monetary policy stance.

Conversely, when inflation is pushing towards or above the top of the mandated range, unemployment may well be low, so that some tightening of monetary policy is appropriate.

The dilemma for monetary policy arises when inflation is well outside the mandated inflation range on the upside and unemployment is uncomfortably high, as currently. Keeping inflation under control strongly suggests a tightening of monetary policy whereas those who are looking at the unemployment numbers will want monetary policy to be eased.

If those setting prices or negotiating wages come to believe that the Reserve Bank will accommodate increased prices and increased wages notwithstanding the effect on inflation in order to have a short-term beneficial effect on unemployment, the task of keeping inflation under control becomes more difficult without any longer-term benefit on the level of employment.

Since the Labour Party recommitted to a dual mandate for monetary policy if it returns to government, various commentators have suggested that it might not make much practical difference to the way monetary policy operates. I strongly suspect that that is because they assume that the Reserve Bank would continue to give ultimate priority to keeping inflation under control.

Paradoxically, because some people may assume that a dual mandate for monetary policy might lead the Reserve Bank to accommodate wage and salary increases inconsistent with its inflation target, a dual mandate could well make the short-term trade-off between inflation and unemployment worse.

Don Brash

27 August 2026

(Governor of the Reserve Bank of New Zealand 1988-2002)