Pioneering search
Rod Oram on top bank’s goals
Finding the right replacement for Graeme Wheeler, who is not seeking a second fiveyear term as Governor of the Reserve Bank, poses an extraordinary challenge to whichever party leads the next government after September’s election.
Over the past decade, central bankers had to devise many new tools to help their battered economies through the Global Financial Crisis and its aftermath.
The future looks even tougher for them. Sluggish global growth, trade and productivity, not to mention anaemic, or even negative, inflation and interest rates, defy conventional monetary policy.
Systemic risks are escalating, too, in the likes of China’s massive indebtedness, and the deep contradictions and dysfunctions in President Donald Trump’s economic policies. Worse, his aim to deregulate the US financial system would allow banks to resume much of the risky behaviour that triggered the GFC.
Big structural change is at work too. For example, as the world shifts to cleaner energy, the value of fossil fuel companies will likely plummet. This is a particular preoccupation of Mark Carney, Governor of the Bank of England, who chairs the G20’s Financial Stability Board. As a result, new climate disclosure rules for companies are coming.
Meanwhile, politicians are ever more intrusive. As a candidate, Trump repeatedly said he would replace Janet Yellen as chair of the Federal Reserve when her term expires next February. He is deeply unhappy with the Fed’s loose monetary policy and tight financial regulation.
Life is no easier for central bankers in Europe. Carney is leaving his role in mid-2019, two years short of a full term; and Mario Draghi, president of the European Central Bank, has to contend with the rise of neo-nationalists and the resulting pressure on the EU and eurozone.
By comparison with his colleagues overseas, Wheeler has had an easier time over the past five years. Yet he has still major, major challenges. The three key drivers of economic growth – Chinese consumers, migrants and earthquakes – have created deep distortions in the housing and dairy sectors and strained many others.
With the Government painfully slow to act on housing, the Reserve Bank had to help the best it could by developing macro-prudential tools such as loan to value ratios. Similarly, it has been the sole source of sobering analysis on the deeply indebted dairy sector.
The external environment also continues to be very troublesome for it. Very low inflation and interest rates overseas, compounded by the high New Zealand dollar, have kept inflation here very low. Thus, the Reserve Bank has failed to meet its inflation target during Wheeler’s tenure.
To its credit, its economic forecasts have been somewhat less wrong, particularly on inflation, than those from the private sector. But even so, the Reserve Bank has been at best a competent commentator on economic developments here and abroad, rather than an insightful analyst of profound changes underway in the global economy.
So, while there is strenuous debate overseas about how monetary policy and other core practices of central banks have to evolve to remain effective, our Reserve Bank has given scant evidence of any work of its own on these bedrock issues.
In the late 1980s, New Zealand was the great pioneer in the world of designing and running a politically independent central bank. But over the decades since, it has increasingly become a follower.
We need to be a pioneer again, given that our tiny and very open economy is at the mercy of global forces. But the chances are very slim. The last deep think about the Reserve Bank was David Parker’s policy proposals for it for Labour at the last election.
This election, Labour, the Greens and NZ First are all promising some changes to the Reserve Bank Act. But they will likely be superficial ones relative to the scale of the challenge. National is even less keen on change.
So, the best we can hope for is the next government, regardless of which party leads it, has the courage to recruit a rare individual as the next Reserve Bank Governor - a person who is highly experienced in the intricacies of the job, yet insightful and brave enough to restore the institution to world leadership.
We need to be a pioneer again, given our tiny and very open economy is at the mercy of global forces.