She was 'appalled' he was reappointed without an independent review, so how will likely incoming Finance Minister Nicola Willis get on with RBNZ Governor Adrian Orr?

As the new National-led government assumes office, a fascinating area to watch will be the relationship between the new Finance Minister and Governor of the Reserve Bank.

Whilst in opposition Nicola Willis, expected to be Minister of Finance, was highly critical of the Reserve Bank's performance, aggressively challenging its Governor Adrian Orr in select committee hearings.

Labour's Grant Robertson reappointed Orr to a second five-year term last November despite opposition concerns. Orr's term began in March this year and runs until 2028, which is beyond the next election.

National leader Christopher Luxon had called for an independent review of the Reserve Bank's performance during 2020 and 2021 before Orr was reappointed. When Graeme Wheeler quit as Reserve Bank Governor after one term in 2017, the then-National government appointed Grant Spencer Acting Governor for six months through the election period. This enabled Robertson to appoint Orr after the Labour-led government took office.

Willis declared herself "appalled" Orr's reappointment came without an independent review of the Reserve Bank’s performance, saying the following:

"In recent years, Adrian Orr as the Chair of the Monetary Policy Committee signed off on an extraordinary programme of money printing and cheap lending that pumped tens of billions of dollars into the economy."

"That programme directly contributed to house prices rising 28% in one year, inflation rising to a 32-year high, and record bank profits. New Zealanders now suffering through a cost of living crisis are owed some answers. Was a more careful monetary policy approach warranted? Has the Bank fulfilled its mandate? Did Orr get it wrong?"

“The Government’s refusal to even ask these questions shows contempt for the New Zealand public. It’s not enough for the Minister of Finance to lean on the endorsement of the board he helped appoint. He should have kicked-off a thorough external review to satisfy himself and New Zealanders that the Bank did the best it could have. Instead, he has directly shied away from any semblance of accountability. The ‘ask no questions’ approach is unacceptable."

For his part Orr said in August he had no plans to quit, should the election usher in a new government. At that time Willis reiterated a National-led government would require the central bank to have its Covid-era decision-making independently reviewed, but said she respected the independence of the Reserve Bank and wouldn’t make any assessments of individuals until that review was completed.

The Reserve Bank did commission a review itself of its monetary policy. This concluded it should've started tightening monetary policy sooner than it did. Willis described this as "the Reserve Bank's marking of its own homework."

Following the weekend's election the scene is thus set for what at the very least will be an interesting relationship between Orr and his new Minister.

Whilst much is made by politicians of the Reserve Bank's independence, they both appoint the Reserve Bank's Governor and make, and change, the laws it operates under. They may also question its actions, should they choose to. Notably the then-Prime Minster John Key expressed scepticism about the Reserve Bank's potential use of loan-to-value ratio (LVRs) restrictions on low equity home loans before these were introduced in 2013.

Change in the pipeline

One change National has pledged to make is to end the Reserve Bank's dual monetary policy mandate, by removing the focus on supporting maximum sustainable employment, introduced by Robertson in 2018, and refocusing it back solely on fighting inflation.

And an area of potential tension between the new government and the Reserve Bank could be if the prudential regulator looks to enforce debt-to-income ratio (DTI) restrictions on banks' mortgage lending. A so-called macro-prudential tool like LVR restrictions, DTI limits are calculated based on a simple ratio of borrower debt divided by borrower income. They fall under the Reserve Bank's financial stability, rather than monetary policy, remit.

The Reserve Bank would only consider introducing DTIs if the currently soft housing market took off again. It spent several years trying to get a DTI tool added to its macro-prudential Memorandum of Understanding with the Minister of Finance, but was thwarted by both National and Labour governments until gaining support from Robertson in June 2021 as the housing market ran rampant. Even that came with the caveat the design and implementation of such a restriction "will have regard to avoiding negative impacts, as much as possible, on first home buyers."

The Reserve Bank has indicated it could have a DTI tool for lenders to use on borrowers taking out home loans ready to go from March 2024, should it wish to enforce it. The central bank is required to consult with the Minister of Finance and the Treasury "from the point where macro-prudential intervention is under active consideration, and will inform the Minister and the Treasury prior to making any decision on deployment of a macro-prudential instrument."

Willis & National not enthused by DTIs

Interest.co.nz asked Willis in April whether as Finance Minister she would allow the Reserve Bank to implement a DTI tool, or want it removed from the macro-prudential tool kit.

"I haven’t had a chance to look at the latest information from the Reserve Bank on that. We’ll study that carefully. Our concern has always been not to choke off New Zealanders wanting to access the homebuying market. We want home ownership to increase and the problem with those kinds of instruments is that they can lock a whole generation out of the housing market and that would concern us," Willis said.

In a November 2021 press release, National's then Shadow Treasurer Andrew Bayly, said Labour must rule out DTIs.

“DTI limits would impose artificial restrictions on the amount banks can lend to home buyers based on their income. To anyone with even the most rudimentary understanding of how banking works, the outcome of such a rule should be obvious - the first people banks will cut lending to are those on low incomes, making it even harder than it already is for first home buyers to get onto the property ladder," Bayly said.

“The Government is supposed to be making things easier for first home buyers, not harder."

As part of a coalition agreement ACT leader David Seymour could potentially become Finance Minister. Seymour has also been highly critical of the Reserve Bank and Orr, having said last year he wouldn't reappoint Orr to a second term.

Despite their reservations, unless a review they commission of the Reserve Bank's monetary policy performance is especially damning, it seems unlikely the new government would sack Orr. Given he's now in the early stages of a second five-year term, forcing him out could potentially involve a substantial payout given Orr's $850,000 to $860,000 annual pay. That's not something the governing parties, who have attacked government spending and perceived waste under Labour, would probably want.

Orr could resign if he believes the relationship is untenable. However, you have to think he'd be unlikely to do that, at least until victory could be declared in the war on inflation. My best guess is that Orr, whilst a larger than life idiosyncratic character, will look to cut his cloth to suit his new masters. After all, when he signed up for a second five-year term he knew a change of government was possible. 

Prior to taking the reins at the Reserve Bank Orr was CEO of the New Zealand Superannuation Fund for 10 years. This period included the election of a National-led government in 2008 which stopped making contributions to the Super Fund.

Speaking to interest.co.nz in 2015, Orr suggested the Government could both resume contributions to the Super Fund, and stop taxing it for the benefit of future generations. Whilst lobbying publicly for change, he headed up the Super Fund through the entire term of the John Key and Bill English-led government.

National's relationship with Key & property sector could also be in focus

Luxon and Willis, meanwhile, will need to manage perceptions around their relationship with Key closely. Former National Party leader and Prime Minister Key, of course, is now Chairman of the country's biggest bank, ANZ NZ. Its key regulator is the Reserve Bank.

Willis was a senior advisor to Key during his first term in government, and much has been made of Luxon's admiration for Key. Key supported Luxon's successful bid for National's leadership in 2021 when Luxon said he spoke fairly often with Key. During the recent election campaign Key told The Post Luxon "might ring up if he wants to have an independent view, or he wants to sound something out, or he just wants light relief from something else."

National will also need to be wary of perceptions around its relationship with the property sector, which can be significantly impacted by Reserve Bank monetary policy and financial stability decisions. RNZ recently reported property industry interests as the biggest donor to political parties since 2021, with National the main beneficiary followed by ACT and NZ First.

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