National’s and ACT’s attacks on the Reserve Bank and its Governor are becoming more frequent and strident. As the
cost-of-living crisis bites deeper, and the Reserve Bank tightens the screws on interest rates, pushing up home mortgage
rates, it becomes easy to portray the Reserve Bank and its Governor as the problem.
Add in the fact that Adrian Orr does not fit the traditional mould of a central banker, with his irreverent flamboyance
and brusque manner (a Doc Martin of the monetary policy world, if you like) and he and the Reserve Bank can quickly be
portrayed as cavalier, financial technocrats playing havoc with, and caring little about, small to medium businesses and
households struggling to get by at present.
With recent announcements of enormous trading bank profits, which have aroused the ire but not any action from the Prime
Minister, a wider picture can be painted of the financial sector, aided, and abetted by an unpredictable Reserve Bank
acting consistently against the interests of increasingly hard-hit average New Zealanders.
But no matter how attractive this scenario looks, the mounting focus on the Reserve Bank and the Governor is in fact
aiming at the wrong target.
It is certainly true that the Governor of the Reserve Bank exercises considerable autonomy in the operation of monetary
policy and the control of inflation. But he is not a law unto himself. He works within the provisions of the Policy
Targets Agreement concluded with the Minister of Finance and the Reserve Bank Act. Therefore, the real target of
criticism for the performance of the Bank and its Governor should be the Minister of Finance.
This is especially so in the current situation where Orr was not only appointed by the current Minister in 2018, but
also reappointed for a further five-year term just this week. Moreover, last year, this Minister also amended the
Reserve Bank Act under which the Governor operates.
That Act not only streamlined the Bank’s governance processes but also balanced the Bank’s historic independence with
greater accountability and reporting requirements. It also introduced a provision enabling the Minister of Finance to
issue a Financial Policy Remit to the Bank, setting out matters its Board must have regard to. When these changes are
added to the Policy Targets Agreement the Minister and the Governor concluded in 2018 requiring the Bank to take
employment outcomes into consideration in the operation of monetary policy, the Reserve Bank now has far less
operational independence than at any previous point since the current framework was established in 1989.
Labour was concerned in Opposition that the Bank’s previous sole focus on controlling inflation lacked context, hence
the decision to broaden the mandate to also include taking employment outcomes into account. They wanted this to reduce
the Bank’s single-minded focus on inflation. However, an unintended consequence of that change has been that the breadth
of the Reserve Bank’s influence on the economy has been extended.
In such circumstances, it is hardly a surprise that the Governor’s role has become more pervasive, as he seeks to
balance controlling inflation and maintaining employment levels at a time of rising living costs and a threatening
global recession. Nor would it be unreasonable to conclude that the apparent greater influence of the Governor on
current economic policy is far more a direct consequence of deliberate policy moves by the current Minister of Finance,
than any personal whim of the Governor of the Reserve Bank.
That is why National, and Act are aiming at the wrong target when they attack Adrian Orr. The real object of their
criticisms should be Grant Robertson who has not only twice changed the arrangements under which the Governor carries
out his statutory functions, but also appointed and reappointed him to the role.
Although National and ACT voted against the new Reserve Bank Act last year, it is far from clear they will overturn it
when they next return to office. Nor is it clear whether they would amend the Policy Targets Agreement back to a purer
focus on controlling inflation. The strong suspicion is they will allow these changes to remain.
In which case attacking the messenger – the Governor and the Bank – is safer than attacking the message. It is also an
easy populist excuse, attacking the Governor and his team for doing the job the government has assigned to them, rather
than the job itself. A more direct criticism of the Minister of Finance for his interference in the historic autonomy of
the Reserve Bank would require National and ACT to spell out where they truly stand on the Bank’s role and independence,
and what they would do to protect and enhance it. In these circumstances, harangues against the Governor are a far
safer, if more cowardly, option.
The independence of the Reserve Bank, guaranteed by statute in 1989, has been hailed worldwide as a strong step towards
ensuring the stability of our monetary and banking systems from the threat of direct political influence on their
day-to-day operations. Much of New Zealand’s improved economic performance in the last thirty years is because of the
Reserve Bank Act, supported by the Public Finance Act and the Fiscal Responsibility Act. Labour’s meddling with the
Reserve Bank since 2017, and now National’s direct attacks on the Governor, pose serious threats to that, to their
mutual shame.