Orr row raises questions of independence
There’s no doubt this week’s results will have weakened [Trump’s] position in the party.
The debate over the future of Adrian Orr as Reserve Bank governor has made one thing very clear: the importance of an independent central bank.
The bank’s monetary policy – over which Orr and his Monetary Policy Committee preside – essentially sets the price of money in the economy. In order to squeeze inflation out of the system, the bank has been lifting interest rates, which should reduce households’ discretionary spending – especially in the first half of next year, when a large wodge of mortgages comes up for refixing.
This is the first time New Zealanders have faced such a sustained period of price increases since the late 1980s. Food prices have hit a 14-year high.
The blame for this is being laid in a series of places: the bank’s cheap money, the war in Ukraine, Covid, supply chain disruptions, limited immigration and closed borders, and low unemployment.
If any single institution is responsible for this getting out of control, it is the Reserve Bank. New Zealand’s system of monetary policy targeting is designed precisely so we can be in charge of our own inflation destiny, regardless of what is going on in other countries.
So the question is not so much one of responsibility, but whether what has occurred has been reasonable, given the remarkable events of the past 21⁄ years and the accompanying high levels of government spending.
As such, whether Finance Minister Grant Robertson was going to keep Orr on as governor has been the subject of intense speculation around Parliament. Looking at it purely politically, would getting rid of Orr admit a mistake in appointing him in the first place, or would he be a convenient scapegoat for inflation? Robertson opted for continuity.
With the benefit of hindsight, the bank, in following a ‘‘least regrets’’ pathway, left interest rates too low for too long, removed loanto-value ratios on home purchases for too long, and gave subsidies to banks to ramp up their lending.
But, and it is an important but, having made the initial error, the central bank – and the Government for that matter – does not wish to compound that mistake by making the problem worse. Having contributed to the massive growth in house prices, a subsequent precipitative rise in interest rates to push inflation out of the system very quickly would likely raise unemployment, and could put a lot of households and businesses carrying debt in a precarious position: negative equity and so on.
Aside from making a lot of people nervous, it could reduce labour mobility (who wants to sell a house on which they might make a loss so they can move to a new area) and general economic confidence. After all, in addition to inflation, the bank is tasked with running policy consistent with achieving ‘‘maximum sustainable employment’’.
It is also worth remembering that the bank acted more or less in concert with the orthodoxy being applied around the world – and that it did start lifting interest rates in response to inflation sooner than other countries. While there is a good argument that the entire global central banking community needs to take a long, hard look in the mirror, that problem is not unique to New Zealand.
The Reserve Bank’s own review of monetary policy, released on Thursday, highlighted various areas for improvement. One of the
external referees of the report, Warwick McKibbin, is a wellregarded monetary economist, a professor at the Australian National University and a former board member of the Reserve Bank of Australia. He is not a man who would be backward in criticisms if he felt they were warranted.
While, overall, he agreed with the bank’s own findings and the lessons learned, he did tellingly note several areas that were beyond the scope of the review.
These included the political framework set for the bank by Robertson; the impact of changing from having the governor solely responsible for monetary policy to
a Monetary Policy Committee (which McKibbin supported); the 2018 change to the bank’s mandate to include ‘‘maximum sustainable employment’’; and the overall appropriateness of inflation targeting in a world dominated by supply shocks.
McKibbin said these issues were all worthy of separate reviews or research – for example, he said it was unclear exactly what ‘‘maximum sustainable employment’’ even meant. He also pointed out a lack of transparency in revealing any diversity of opinions on the Monetary Policy Committee,
and crucially questioned whether the new committee set-up gave sufficient scope for external advice to the central bank.
His overall conclusion was that monetary policy remained too loose for too long but that, given the options the bank faced, that probably wasn’t unreasonable. ‘‘The RBNZ responded better to the Covid crisis and the ongoing shocks in the global economy than many other central banks,’’ he said, but this was muted by the fact that its new policy mandate and remit ‘‘made the policy process more difficult because of the large array of targets and fewer instruments’’.
In other words, the politically
determined parameters made it harder for the bank to do its job.
Which brings us back to the political debate over Orr’s future, should National and ACT hold the Treasury benches after the next election.
National has taken the quite remarkable step of saying it would call an ‘‘independent’’ review into Orr and the bank’s performance ‘‘that would then determine whether we do or don’t have confidence in him going forward’’, according to leader Christopher Luxon.
While sacking the governor would be very difficult without cause, depending on whether and how the war of words over his performance steps up over the next year, he might simply find himself in an untenable position if Luxon, deputy Nicola Willis and ACT’s David Seymour – who has called him the ‘‘architect’’ of inflation – occupy the Treasury benches.
Indeed, the underlying tenor of the criticism levelled at the bank seems to be driven by the characteristics of Orr himself, a man who can switch from being authoritative, charming and expansive to being abrasive, belligerent and combative in the space of a few minutes.
He is seen within National and ACT circles as temperamentally unsuited for the job. His wont to lecture, berate and be generally dismissive of MPs when turning up to parliamentary select committees has endeared him to few.
But a key point here is that, even with all the criticisms of Orr, this week actually highlighted how important the bank’s independence is, while also raising questions of how to balance that independence with accountability. Imagine politicians, with their short-term political incentives, having more say over interest rates.
National says its proposed review is about accountability, while Labour says it would undermine independence. In a way, given the open warning from Luxon to Orr about his job, both are right. Warning a governor he could lose his job could have a chilling effect on independence.
But equally, National isn’t taking issue with Orr’s interest rates settings per se, but rather how he is performing against his mandate.
Politically, National and ACT will be trying to paint Orr as the guy hired by Labour who brought you inflation. The extent to which that succeeds over the coming year will largely depend on events: how long inflation remains, how high interest rates go and how grumpy it makes the public.
In the meantime, Orr is back in the big chair for another five years and is due to deliver his next interest rate decision on November 23.