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10 minutes ago

RNZ News

How does the Reserve Bank set the OCR?

The official cash rate is now set by a monetary policy committee. Photo: RNZ The Reserve Bank will update the official cash rate (OCR) on Wednesday. But have you ever wondered how it goes about making the decision? John McDermott is now executive director of Motu Economic and Public Policy Service but was previously assistant governor and head of economics at the Reserve Bank. He spoke to RNZ this week about how the process works. The OCR is now set by a monetary policy committee, made up of three members of the Reserve Bank's staff - current governor Christian Hawkesby, assistant governor Karen Silk and chief economist Paul Conway. They are joined by external members professor Bob Buckle, economist Carl Hansen and professor Prasanna Gai. McDermott said the way the OCR was set had changed a little with the introduction of the formal committee. It was introduced in 2018, the year before McDermott left the bank. Before that, the Reserve Bank governor was the sole decision maker. Now, the committee aims for a consensus decision but sometimes goes to a vote. But McDermott said the overall approach would be broadly the same. He said there would be three key stages: Looking at what was happening overseas, assessing the situation in New Zealand and thinking about how the decision could be communicated with the right impact. He said the process would usually take about a week. "Staff will have been working on it for a lot longer than that. They'll put together a whole bunch of information on it for the committee to digest." There would normally be two days of "information pooling" meetings, and two days of deliberation meetings, with decision meetings after the deliberation meeting, according to the committee handbook. McDermott said attention would turn first to what was happening in the rest of the world. "What are the key conditions with our trading partners? How's that affecting New Zealand? Probably a lot of detail on the US, a lot of detail on China … probably an equal amount of detail on Australia." He said the committee would then look at financial markets. "Bond markets, equity markets, how does that flow over to New Zealand's access to capital? "It's important to get that setting, once that's established it'll be looking at New Zealand in detail." He said the second day of deliberations would look at recent data. "The minutiae of the data. What's going on with concrete sales or electronic car transactions … hopefully there will be some discussion of what's going on with businesses." He said that would usually involve looking at the results of interviews with various businesses about what they were experiencing. "When you look at the political elements, does that match with what businesses are telling you?" He said the committee would also need to look at banks' willingness to lend and the ability of firms to access capital. "Once you've gone though that it's all about what's happened and what's the environment when we're in. What does that mean for the future? How do you project forward given this is what's happening? What do we expect for inflation output and interest rates …. That will be the core element of the forecasts." He said different members of the committee would bring different experience and judgment, and opinions on what elements should be given more weight. Reserve Bank governor Christian Hawkesby. Photo: "After that process the committee is probably asking the staff, whom they've been leaning on heavily during the week, to not be there. The committee itself will ask what do we think about that, what are the risks? This is what the forecast looks like, this is the decision we think kind of makes sense." He said the committee would consider what the markets would do in response to a decision, and whether they would be shocked by anything that was decided. "What will that do to the prices that matter? And in interest rates, are we going to get the kind of reaction we want? "You should see the results of that in the press conference - this is what we did, this is why we did it ... trying to shape expectations and manage how that is delivered to the country." He said markets had sometimes "got it wrong" and priced in things that the Reserve Bank did not expect to happen. In that case, it would need to clarify the way it saw things. "But by the same token, if you think the financial markets have got it right and you want to validate those expectations you have to be careful not to say something stupid where the markets misunderstand you … you don't want to shock the markets by accident." The handbook said the decision about the appropriate monetary policy settings would be made the morning of the release so that there was less risk of sensitive information being leaked. McDermott said the committee would have to decide which data it needed to pay attention to and what it could set aside as not relevant. If data was volatile, it could sometimes set it aside and decide to come back to it for the next update. Something like a movement in the oil price would have an impact in the short term but then prove immaterial in the medium term. The bank would need to communicate that price increases as a result of something like an oil spike were not going to persist, he said. "With the increase in goods and services tax, prices will go up but they'll go up one time - that's not inflation - so we're going to look through that. But every time the bank or the monetary committee looks through something, it is really important that it explains that it is looking through something." McDermott said the geopolitical environment made rate setting hard at the moment. "There's tariffs that are playing out. What are they doing? Who's paying them? How are they affecting supply chains? Are they going to be the same next week as this week? There's a lot of noise and so you've got to be very disciplined in how you work through that." He said it was also important to be upfront when a judgment was wrong. "It's really important that central banks, when they've made a mistake, just front up and say 'look we made this judgment. We were clear on the judgment we made and it hasn't panned out that way so we're changing how we view things'. I think there's been a reluctance to do that in recent times … and I think that's a shame because it really is important." The Reserve Bank said, when the economic outlook could be at a turning point, the committee might use a "hawks and doves" exercise. "One MPC adviser would play the role of the 'Hawk', presenting all analysis that would support contractionary monetary policy, and then another would play the role of the 'Dove', presenting all analysis that would support expansionary monetary policy. This exercise aims to challenge the status quo and encourage wider deliberations." Sign up for Ngā Pitopito Kōrero , a daily newsletter curated by our editors and delivered straight to your inbox every weekday.

RNZ News

2 hours ago

RNZ News

How does the Reserve Bank actually set the OCR?

The official cash rate is now set by a monetary policy committee. Photo: RNZ The Reserve Bank will update the official cash rate (OCR) on Wednesday. But have you ever wondered how it goes about making the decision? John McDermott is now executive director of Motu Economic and Public Policy Service but was previously assistant governor and head of economics at the Reserve Bank. He spoke to RNZ this week about how the process works. The OCR is now set by a monetary policy committee, made up of three members of the Reserve Bank's staff - current governor Christian Hawkesby, assistant governor Karen Silk and chief economist Paul Conway. They are joined by external members professor Bob Buckle, economist Carl Hansen and professor Prasanna Gai. McDermott said the way the OCR was set had changed a little with the introduction of the formal committee. It was introduced in 2018, the year before McDermott left the bank. Before that, the Reserve Bank governor was the sole decision maker. Now, the committee aims for a consensus decision but sometimes goes to a vote. But McDermott said the overall approach would be broadly the same. He said there would be three key stages: Looking at what was happening overseas, assessing the situation in New Zealand and thinking about how the decision could be communicated with the right impact. He said the process would usually take about a week. "Staff will have been working on it for a lot longer than that. They'll put together a whole bunch of information on it for the committee to digest." There would normally be two days of "information pooling" meetings, and two days of deliberation meetings, with decision meetings after the deliberation meeting, according to the committee handbook. McDermott said attention would turn first to what was happening in the rest of the world. "What are the key conditions with our trading partners? How's that affecting New Zealand? Probably a lot of detail on the US, a lot of detail on China … probably an equal amount of detail on Australia." He said the committee would then look at financial markets. "Bond markets, equity markets, how does that flow over to New Zealand's access to capital? "It's important to get that setting, once that's established it'll be looking at New Zealand in detail." He said the second day of deliberations would look at recent data. "The minutiae of the data. What's going on with concrete sales or electronic car transactions … hopefully there will be some discussion of what's going on with businesses." He said that would usually involve looking at the results of interviews with various businesses about what they were experiencing. "When you look at the political elements, does that match with what businesses are telling you?" He said the committee would also need to look at banks' willingness to lend and the ability of firms to access capital. "Once you've gone though that it's all about what's happened and what's the environment when we're in. What does that mean for the future? How do you project forward given this is what's happening? What do we expect for inflation output and interest rates …. That will be the core element of the forecasts." He said different members of the committee would bring different experience and judgment, and opinions on what elements should be given more weight. Reserve Bank governor Christian Hawkesby. Photo: "After that process the committee is probably asking the staff, whom they've been leaning on heavily during the week, to not be there. The committee itself will ask what do we think about that, what are the risks? This is what the forecast looks like, this is the decision we think kind of makes sense." He said the committee would consider what the markets would do in response to a decision, and whether they would be shocked by anything that was decided. "What will that do to the prices that matter? And in interest rates, are we going to get the kind of reaction we want? "You should see the results of that in the press conference - this is what we did, this is why we did it ... trying to shape expectations and manage how that is delivered to the country." He said markets had sometimes "got it wrong" and priced in things that the Reserve Bank did not expect to happen. In that case, it would need to clarify the way it saw things. "But by the same token, if you think the financial markets have got it right and you want to validate those expectations you have to be careful not to say something stupid where the markets misunderstand you … you don't want to shock the markets by accident." The handbook said the decision about the appropriate monetary policy settings would be made the morning of the release so that there was less risk of sensitive information being leaked. McDermott said the committee would have to decide which data it needed to pay attention to and what it could set aside as not relevant. If data was volatile, it could sometimes set it aside and decide to come back to it for the next update. Something like a movement in the oil price would have an impact in the short term but then prove immaterial in the medium term. The bank would need to communicate that price increases as a result of something like an oil spike were not going to persist, he said. "With the increase in goods and services tax, prices will go up but they'll go up one time - that's not inflation - so we're going to look through that. But every time the bank or the monetary committee looks through something, it is really important that it explains that it is looking through something." McDermott said the geopolitical environment made rate setting hard at the moment. "There's tariffs that are playing out. What are they doing? Who's paying them? How are they affecting supply chains? Are they going to be the same next week as this week? There's a lot of noise and so you've got to be very disciplined in how you work through that." He said it was also important to be upfront when a judgment was wrong. "It's really important that central banks, when they've made a mistake, just front up and say 'look we made this judgment. We were clear on the judgment we made and it hasn't panned out that way so we're changing how we view things'. I think there's been a reluctance to do that in recent times … and I think that's a shame because it really is important." The Reserve Bank said, when the economic outlook could be at a turning point, the committee might use a "hawks and doves" exercise. "One MPC adviser would play the role of the 'Hawk', presenting all analysis that would support contractionary monetary policy, and then another would play the role of the 'Dove', presenting all analysis that would support expansionary monetary policy. This exercise aims to challenge the status quo and encourage wider deliberations." Sign up for Ngā Pitopito Kōrero , a daily newsletter curated by our editors and delivered straight to your inbox every weekday.

How Jacinda Ardern's ‘Groundbreaking' Climate Law Has Become ‘A Shell'

Scoop

9 hours ago

Scoop

How Jacinda Ardern's ‘Groundbreaking' Climate Law Has Become ‘A Shell'

Article – RNZ When New Zealand passed the Zero Carbon Act in 2019, it was hailed as a world-first – a law with cross-party support that would enshrine climate ambition in legislation. Paired with the country's first Emissions Reduction Plan and billions of dollars in ring-fenced climate funding, it represented then-Prime Minister Jacinda Ardern's promise to tackle her generation's 'nuclear-free moment' head on. Six years on, analysis suggests the law has been hollowed out to little more than a husk. While its legal targets remain, nearly every policy designed to meet them has been scrapped, most without replacement. Data collated by RNZ shows that since it came to power in 2023, the coalition government has repealed, defunded, or delayed dozens of climate initiatives – from electric bus funds to agricultural emissions pricing to subsidies for solar and wind. Officials have been ordered to stop planning for lower car use. Climate scientists have lost their jobs. And this month, a ban on exploration for oil and gas was repealed. 'The Zero Carbon Act is a shell,' said 350 Aotearoa strategic adviser Adam Currie. 'It was supposed to be our lifeboat, but this government is deliberately drilling holes in it.' Just a handful of the original policies remain. Instead, the coalition's climate plan leans heavily on a strengthened Emissions Trading Scheme, alongside pledges to double renewable energy, invest in carbon capture, and reduce agricultural emissions through new technology. Prime Minister Christopher Luxon has insisted the country is 'doing everything we can' to meet its targets, by focusing on the sectors that produce the greatest emissions. But the Climate Change Commission's 2025 monitoring report is now warning the coalition's plan won't be enough. New Zealand is likely to meet its first emissions budget (to 2025), the commission's July report said. But for the second and third emissions budgets, covering the decade to 2035, the commission finds current policies are unlikely to deliver. 'In many sectors, there is no clear policy pathway to cut emissions at the pace and scale required,' the report said, highlighting agriculture, transport, and energy as risk areas. 'More work is needed – and soon – to lay the groundwork for emissions cuts after 2030.' The commission was particularly concerned about the lack of plans for gross emissions reductions – actually cutting fossil fuel use – as opposed to relying on forestry to offset emissions. It noted that in the third budget period, 46 percent of planned reductions come from forest removals alone. 'There is risk in relying on a single sector for a large proportion of reductions,' it said. Delaying real action risked forcing more costly and disruptive changes later, and increased the burden on future generations, the commission said. The government will formally respond to the commission in October. But Minister for Climate Change Simon Watts said the amendments it had made to the first emissions reduction plan were allowed under the law. 'As a government we are prioritising policies that deliver cost-effective climate action for New Zealand,' Watts said. 'We removed actions that weren't expected to directly reduce emissions and, based on our current projections, we're still on track to meet our first emissions budget.' At a time when many governments are backing away from climate goals, National has said – despite pressure from its coalition partners – it will not repeal the Zero Carbon Act. But critics argue that undermining it is no better. 'In our view, the Act clearly requires a more ambitious and credible climate strategy – one that is less high-risk and reliant on pine trees,' said Lawyers for Climate Action NZ's Jessica Palairet. 'The government is also falling short of a core purpose of the Act – to provide a framework for clear, stable climate policy.' Labour's climate spokesperson Deborah Russell said the coalition's sole focus on the Emissions Trading Scheme, rather than considering other measures, had rendered the Act largely ineffective. 'They're fulfilling the letter of the law in responding to the budgets and doing the plans, but they're not showing how they're going to get the emissions down.' When is a law not a law? The Zero Carbon Act 2019 was not a standalone law – it amended the existing Climate Change Response Act 2002, transforming it from a policy tool into a legislative backbone for emissions reduction. The main function was to set legally binding long-term targets, intended to align with global efforts to limit warming to 1.5°C above pre-industrial levels. The Act committed Aotearoa to reaching net zero greenhouse gas emissions (excluding biogenic methane) by 2050, and to cutting biogenic methane from livestock and waste by 24-47 percent by 2050, with an interim target of 10 percent by 2030. To ensure progress, the Act also introduced a system of five-yearly emissions budgets, which cap total emissions across the economy. These budgets are not sector-specific but are supported by Emissions Reduction Plans (ERPs), which outline how the government intends to meet them through policies and funding across energy, transport, agriculture, and industry. This was meant to 'anchor climate ambition in legislation', making a stable framework that would survive election cycles. The rest of the climate policies – from transport subsidies to decarbonisation incentives – were meant to fill out its bones. The following sections show what remains of that original body of work, what has been stripped away, and what has replaced it. Still standing (sort of) NZ Emissions Trading Scheme (ETS): The ETS is the main market tool used to reduce emissions. The Labour government aimed to adjust its settings to balance direct emissions cuts and offsets like forestry. The coalition government instead wants to restore confidence by ending vintaging, treating forestry NZUs (New Zealand Units) equally, and reducing the number of credits available. Centre for Climate Action on Agricultural Emissions: The centre is a core component of the Luxon government's climate change response and one of the only major policies to continue from the Labour government. It houses both the national agriculture emissions research centre and a public/private partnership named AgriZeroNZ, designed to accelerate the development and uptake of emissions-reduction tools, practices, and technologies on farms. Electric Vehicle (EV) charging infrastructure: Labour's prior commitment to improving electric vehicle charging infrastructure across New Zealand continues, although the coalition government shifted from using grants to using concessionary loans, and light EVs began paying Road User Charges (RUCs) from April 2024. The government's target is 10,000 public EV charging points by 2030, however there are currently under 1400 in commission. Improved insulation standards: Efforts to improve insulation standards for new buildings, aiming for significantly reduced energy requirements for heating, remain ongoing despite initial plans to roll them back. Grant scheme for clean heavy vehicles: The Low Emissions Heavy Vehicle Fund aims to encourage businesses to adopt cleaner heavy vehicles, including trucks, heavy vans, and non-public transport buses. The fund received new funding in 2024. Cheaper public transport: Half-price public transport for under 25s and free transport for kids ended last year, but the discount remains in place for community service card holders. Regulated product stewardship for refrigerants: A mandatory product stewardship scheme for refrigerants, initially investigated under ERP1, is coming into effect from 2025. Sustainable aviation fuels partnership: Collaboration with Air New Zealand on sustainable aviation fuels remains ongoing. Coal boiler phase-outs: The government's commitment to replace all remaining coal boilers in schools by 2025 remains in place, alongside the broader ban on new low- and medium-temperature coal boilers and the phase-out of existing ones by 2037. Develop a Māori climate strategy: This initiative is intended to elevate te ao Māori and mātauranga Māori within the overall climate response. Despite a funding cut, this initiative remains ongoing. Delayed, defunded or discontinued Many distinct policies and the overall framing of the Ardern era's emissions reductions plan (ERP1) have been altered, put on hold, or had funding cut by the current government. These include: Agricultural emissions pricing: ERP1 envisioned an emissions pricing mechanism for agriculture by 1 January 2025. The current government has delayed this to no later than 2030 and committed to keeping agriculture out of the NZ ETS. This is a fundamental change from the previous government's approach under the He Waka Eke Noa model. Climate Emergency Response Fund (CERF): The ERP1 established the CERF, which ring-fenced revenue from the ETS for climate initiatives, with an initial payment of NZ$4.5 billion. The current government ended the CERF in May 2024, meaning future climate investments will go through the usual Budget process. This discontinuation is estimated to result in a loss of 11-24 million tonnes CO2e of abatement over the first, second, and third emissions budget periods. Clean car discount: This initiative, which aimed to make electric vehicles more affordable, was an ERP1 policy. It was stopped on 31 December 2023. Sustainable biofuels obligation: This was an ERP1 initiative aimed at reducing freight emissions. It was discontinued as part of a government policy refocus in February 2023. Oil and gas exploration ban: The Labour-led government banned offshore oil and gas exploration. The current government reversed this ban. This reversal is estimated to lead to an extra 14.2 million tonnes of emissions to 2035, and 51.5 million tonnes of CO2 emissions up to 2050. Subsidies to large carbon polluters: Climate Change Minister Simon Watts rejected advice from Inland Revenue and Treasury to review hundreds of millions of dollars in climate grants to major emitters like NZ Steel, Methanex, Rio Tinto, and Fletcher Building, despite findings of 'very limited results'. Science sector reforms and cuts: The Te Ara Paerangi – Future Pathways science-system reform programme has been discontinued. There have also been job cuts at the National Institute of Water & Atmospheric Research (NIWA) which critics say will negatively impact climate change science, including marine biodiversity, climate modelling, and physical oceanography. Transport initiatives: The ERP1 aimed to improve travel choices by providing convenient, affordable public transport, walkways, and cycle lanes. The current government has ordered officials to end work on programmes that would reduce vehicle kilometres travelled (VKT) by passenger cars through providing alternatives like public and active transport. It also cut an initiative to increase the uptake of e-bikes, ended some public transport subsidies, got rid of equity measures to help low-income households access low-emissions cars, and defunded a $56 million fund specifically for electric buses. Auckland Light Rail and Let's Get Wellington Moving were canned, although the City Rail Link and extra Auckland busways will continue. A commitment to set a high threshold for investing in new roads was also discontinued. The current government is instead prioritising motorway funding and increasing speed limits. Equity and 'just transition' focus: Several ERP1 actions related to an equitable transition have been discontinued, including those which seek to support industries and workers to retrain in low-emissions jobs. The development of an income insurance scheme was also cut. Circular economy and bioeconomy strategy: ERP1 included a Circular Economy and Bioeconomy Strategy and supporting businesses moving to circular economy models. These actions have been stopped. Energy efficiency rebates: ERP1 included rebates for energy-efficient equipment. This has been stopped. New fossil-fuel baseload generation ban: ERP1 included a ban on new fossil-fuel baseload generation. This has been cancelled. New Zealand Battery Project: ERP1 stated that options for dry-year electricity storage through the New Zealand Battery Project would be investigated. This has been cancelled. Gas transition plan: ERP1 included developing a gas transition plan. This was associated with the Labour government's ban on offshore oil and gas exploration and has been abandoned with the reintroduction of exploration. Government Investment in Decarbonising Industry (GIDI) Fund: In 2020, the government created a $70m fund to incentivise companies with large fossil-fuel boilers to decarbonise. It has been closed to new applications. The estimated loss in emissions reductions from discontinuing the GIDI fund is 4.3 million tonnes of CO2e for 2026-2030. Forestry in the ETS: The Labour government introduced changes for 'permanent forestry' in the ETS from 1 January 2023. The National-led coalition has announced an independent review of forestry in the ETS. The government is also limiting whole-farm conversions to NZ ETS forestry to protect highly productive farmland. Monitoring renewable electricity target: While ERP1 set an aspirational target of 50 percent of total final energy consumption from renewable sources by 2035, monitoring progress towards this target has been stopped. Climate finance: The New Zealand Green Investment Finance (NZGIF), a fund established to support renewable energy and other low-emission projects, has been stopped. Pacific climate finance: Future climate finance to help our Pacific neighbours was cut from $250m to $100m this year. Climate-Related Disclosures (CRD) Regime: The government has proposed raising thresholds so the regime applies to fewer large entities and reducing the liability exposure for entity directors. Warmer Kiwi Homes initiative: Funding for the Warmer Kiwi Homes scheme, including subsidies for hot water heating, low-cost energy efficiency measures, and an LED lighting scheme were cut, alongside funding for a community-focused outreach programme to target hard-to-reach households. Waste management: The government put four out of five waste minimisation policies on hold in 2024, including plans to improve recycling systems and introduce a kerbside food scraps composting scheme. The Waste Minimisation Fund also had its funding cut. Tikanga-based agriculture programmes: Dedicated funding for programs to support Māori aspirations in agriculture was cut. Native trees to absorb carbon: Funding for Establishing Native Forests at Scale, a research and planting programme, was cut by $50m in Budget 2024. Dedicated climate-focused farm advisory and extension services: This was intended to include multichannel information campaigns, extension programmes (workshops, action groups), and growing a pipeline of trusted industry advisers. This has been stopped, although support continues through existing public and private advisory services. National Adaptation Plan: The coalition government discontinued a number of measures from the first National Adaptation Plan (NAP1) including work on risk management and planning for managed retreat. Although ERP2 outlines three adaptation goals, the Climate Change Commission noted there was not enough information to assess whether they are achievable. What's Replacing It Carbon Capture, Utilisation, and Storage (CCUS): The government is developing an enabling regulatory regime for CCUS, with legislation expected this year, to allow industries to access this technology for emissions reduction and removal. Fast-track approvals bill: The controversial Fast-track Approvals Bill is designed to streamline and accelerate the consenting process for various development and infrastructure projects, including renewable energy. Critics say it allows the 'override of environmental laws' and does not give sufficient weight to climate considerations, potentially making it more difficult to meet emissions budgets. Methane review: An independent review of biogenic methane science and targets has been initiated to provide up-to-date scientific evidence regarding methane's warming impact. It is widely expected the government will drop the methane target post-review. Electrify NZ: This aims to double renewable energy by 2050. This includes streamlining consenting processes through the Fast-track Approvals Bill. Work is underway to develop a regime for offshore renewable energy by mid-2025. Adaptation framework: Work is underway on an adaptation framework that aims to minimize long-predictable funding, improve information flows, and address market failures.

'Typo' could have cost council $20m

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How does the Reserve Bank set the OCR?

How does the Reserve Bank actually set the OCR?

How Jacinda Ardern's ‘Groundbreaking' Climate Law Has Become ‘A Shell'

'Typo' could have cost council $20m

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How does the Reserve Bank set the OCR?

How does the Reserve Bank actually set the OCR?

How Jacinda Ardern's ‘Groundbreaking' Climate Law Has Become ‘A Shell'

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