The Reserve Bank of New Zealand (RBNZ) is facing heightened scrutiny as it works to restore price stability after the chaos of the pandemic and in the run up to a general election.
Criticism of the central bank has begun to move beyond economics and into the political realm as inflation has become a key election issue and a political football.
The situation has been made worse by a lack of bipartisan support for RBNZ governor Adrian Orr, who was reappointed last year despite opposition from the National and Act parties.
While the Minister of Finance formally appoints the Governor, they can only do so if that person has been recommended by the bank’s board of directors.
The Minister is also required to consult with other political parties before appointing a governor, although the minister doesn’t have to listen to their feedback.
When Orr’s first five-year term ended last year, Finance Minister Grant Robertson opted to follow the board’s recommendation, saying it would politicise the central bank to refuse.
Robert MacCulloch, a macroeconomics professor at Auckland University, said in an ideal scenario the governor would have the support of both major parties.
For example, the US Federal Reserve chair Jerome Powell was appointed by Donald Trump and then subsequently reappointed by Joe Biden — despite intense partisanship in the US.
New Zealand has lost the best-practice bipartisan consensus that keeps politics out of monetary policy, he says.
Allegations refuted
MacCulloch said not having broad political support cast doubt on the independence of the Governor and the motivations behind some decisions.
The academic has alleged, without providing any evidence, that the bank may hold the Official Cash Rate at 5.50% to improve Labour’s chances of re-election.
Since April 2019 monetary policy decisions have been made by a monetary policy committee, and not by the governor alone.
The RBNZ has now increased the OCR by 525 basis points since first raising it from its record low of 0.25% in October 2021, its fastest hiking cycle ever. Orr last year said the RBNZ was trying to engineer a recession to rein in inflation that had topped 7%.
RBNZ Assistant Governor Karen Silk told Interest.co.nz the seven-person committee did not consider political factors when making policy decisions.
“You will always get political commentary and different political perspectives on where monetary policy sits, or it might be politicised by what the media is saying,” she said.
“But in terms of the monetary policy committee, you have to ride above that and focus on the job that you're there to do, with the information you have at hand.”
Silk said when the committee was making its April decision, it had become clear the inflation impact from the cyclone rebuild would be greater than it had thought in February.
This was one of the factors, along with tourism and migration, that prompted the committee to opt for the 50 basis point rate hike in the meeting prior to the budget.
The RBNZ’s interest rate projections have not changed materially since November and the monetary policy committee has stuck to the path it signalled months ago.
After another 25 basis point increase in May, the committee has brought the OCR to a level it expects will restrict spending enough to bring inflation back into its 1% to 3% target band.
Some economists think the central bank will need to do one more hike, while others think it has already been too aggressive and will have to start cutting rates sooner than planned.
Timing tilted?
Stephen Toplis, head of research at BNZ, said some observers thought the central bank had opted for a bigger rate hike in April, so that it could afford to be less aggressive in May.
Getting the increase ahead of Budget 2023 was being interpreted by some as an effort to avoid being “embroiled in the political process” while fiscal policy was being debated, he said.
These comments related only to the timing of interest rate decisions, not their extent or direction.
Politicians and media were setting up a showdown between the Budget and the Bank, which could generate headlines that would impact public opinion and the outcome of the election.
An Act Party press release claiming government spending would force more hikes was titled: “Thank Grant Robertson for your next interest rate rise”.
In response, the Finance Minister told Newshub he did not think there was any cause for another rate hike as a result of his recent budget.
When Orr eventually said fiscal policy was not inflationary across the forecast period, some suggested this was a politically-motivated interpretation.
'The independence of the Reserve Bank is really important'
Robertson told Interest.co.nz that talking about interest rates was unavoidable but he’d always tried not to comment on the merits of Reserve Bank decisions.
“I do think the independence of the Reserve Bank is really important, and the integrity of the Governor and the Monetary Policy Committee should not be brought into question”.
“There is no justification to bring them into question and I think it is not good for the operation of good public policy,” he said.
Act Party leader David Seymour said Adrian Orr had contributed to politicisation with his “flamboyant character” and for focusing on things beside inflation.
He wants price stability to be the central bank’s sole monetary policy objective, removing its other objective to support maximum sustainable employment, which he thinks would prevent any opportunity for political influence.
“If there is a clear objective to achieve on a clear timeline, and if they don’t do it they are fired, then I don’t think they will care what any politician says”.
24 Comments
Does anybody actually believe there isn't a strong political consideration/factor to the appointment of senior civil servants? Apart from the Police Commissioner (who - along with his predecessor - is clearly an AI experiment masquerading as a human) they are all human like the rest of us, and to Orr is human after all ... how can anybody do their job without bringing some element of politics into it?
100% politics comes into it. If you want to get reappointed you better not piss off the minister with additional rate hikes in an election year.
Would be a very unpopular move.
Bring in the AI I say. Replace the policy setting committee with an algorithm that looks at the data coming in from NZ and around the world and makes its decisions purely on that.
Obviously the politicians would never go for it.
Fascinating point mrtambo73!
I'd not considered it but yes, data heavy AI based on algorithmic computation has very real application?
My concern would be what if the AI completely blind-sides us with such next level unpredictable orders that it inadvertently causes well, think SkyNet?
Not knowing NEARLY enough on the potential downsides, my limited understanding is it would learn from history and it's mistakes. I'm not at all sure how it would measure the human emotional insanity that tends to infect us (think FOMO)?
Currency is a unit of sovereignity of a state. All states issue their own currency and it is the physical sign of your trust in a government's legitimacy. Whether it is a standard of gold and merely a fiat unit of tax payment.
The Governor is fundamentally political regardless of nominal attempts to depoliticize it.
Did the board provide GR with one option or a list of choices with Orr as the preferred option? There's a lot missing from this debate. If they just recommended Orr with no other choices the question is why? Was there no alternatives applying or considered acceptable. if so on what grounds? If there was a choice, why were they rejected?
It'd be surprising if they could have $40bn of LSAP assets still on the books and have it not be a hot potato with inflation at multi-decade highs. I hope whoever is appointed next is a moderating influence on the institution.
Phrases like "Path of least regrets" and "Looking through inflation" panic me because it means RBNZ is about to go off script.
Here are actual quotes from Philip Lowe recorded in a Senate hearing yesterday speaking about Australia's rental crisis:
"We need more people on average to live in each dwelling, and prices do that"
"The higher prices do lead people to economise on housing" Link
Hate his guts but he at least has the gall to say this out loud, unlike the governments on both sides of the Tasman who are happy for low earners and the young to modify their "economic behaviour" in response to high migration that mostly benefits the wealthy.
How do you think the RB would react differently if National was in power then?
Do you think they would then push interest rates higher to meet inflation targets, and who cares what that does to asset prices? I can't ever recall National complaining about low interest rates.
“I do think the independence of the Reserve Bank is really important, and the integrity of the Governor and the Monetary Policy Committee should not be brought into question”.
The man, who re-hired Orr after he failed in all counts of his mandate and repeatedly bleated war in Ukraine and covid as cause for his own incompetence, would say that we shouldn't question the integrity of the governor of the RBNZ. We should, as the public who voted these people in and who pay their salaries from taxes, always scrutinise our government and hold them to account if there is any hint of dishonesty, sorry better rephrase to current govt terms, 'lack of transparency' or issue with integrity which could undermine the publics confidence in the elected government.
Of course it is political... Croaking Cassandra has written a number of well researched articles on the deeply floored RBNZ Board, from their total absence of relevant experience through to appointing a Board member who was also a director of an RBNZ regulated entity. It's a total farce, but why wouldn't it be - everything is pretty much a joke these days and there is rarely any evidence of due process.
If you think the independence of the Reserve Bank is, as you say, really important Grant, then I'd suggest you would have been better to have consulted with other parties before reappointing Orr. You then, could have avoided all accusations of the appointment been political.
By not consulting it leaves yourself and your Govt open to being accused of arrogance and/or authoritarian in your leadership style.
Step it up a level. Is our central bank and it's monetarist framework not overtly political? Yes...
The Chicago school economists who managed to get monetarism adopted in the 70s (having bastardised kiwi Bill Phillips' fine work) were very clear about their intent. They wanted to break organised labour (trade unions) - and prevent workers having the power to negotiate higher wages. They reasoned that this would prevent inflation taking off, and that having a bufferstock of hundreds of thousands of unemployed people seeking work was a price worth paying. Since then, unemployment in NZ, US, UK etc has been held at levels way above the post-war period - with central banks slamming the breaks on the economy every time unemployment looks like it is getting 'too low'. NZ data here.
What we have learned over the last couple of years of course is that inflation is very rarely wage-driven. The US Fed have published papers on this in the last few days. Bill Phillips would not have been surprised. He reasoned that inflation was typically the result of a rapid change in the cost of key imports (hello oil and fertiliser prices in 2021) and / or rapid changes (surges) in employment (hello 2021 again). The monetarists ignored these parts of Bill's work - creating a ridiculously crude and flawed unemployment vs inflation graph (the Phillips Curve).
Anyway, enough history. My point is that monetarism is overtly political; it is literally designed to support firms and employers to profit, and to prevent workers gaining the power to negotiate a better share of those profits.
Robbo is guilty of being both arrogant & authoritarian as charged. His punishment will be the rest of his life on the parliamentarian's superannuation, which as most of you know, is very nice than you very much.
History will however continue to judge him (?) as we are made aware of the things we don't yet know about, until after this year's election & ongoing etc. as we all finally get to put behind us the ugly social experiment that was the 6th labour Govt of Aotearoa/New Zealand.
My guess is that it will take the best part of a working generation to put back into some sort of shape that we can all live with in the future. That doesn't count the 350,000 working aged no hopers, most of whom do not want to & will not work for a living for the rest of their miserable lives. Sigh. These are the 'existers' who weigh everything & everybody down, as they bludge, fudge, sludge & smudge their way through their wasteful & totally unnecessary existenses.
How many people believe the reserve bank can actually reduce the effects of inflation?
Can they:
1) reduce the cost of fuel? (no, the government can reduce fuel tax)
2) create a competitive grocery sector? (no, the government should)
3) reduce the cost of imported goods?
Obviously they can't. So what can they do?
1) Create more inflation by increasing borrowing costs
2) put a handbrake on investment by making it hard to borrow
3) make a variety of businesses fail leaving the strong ones to survive and dominate the market, raising prices.
The reserve bank has too much power, it is time to change this. With urgency.
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