Adrian Orr was appointed in December 2017, effective March 2018. That means the five years is nearly up and there will be more chatter about the reappointment next quarter. The tricky thing is that Finance Minister Grant Robertson decides the appointment, but has also been responsible for making the job much harder than it needs to be.
Orr wasn’t wrong when he said ‘fiscal policy needs friends.’ He meant the Government policy needs to reinforce the Bank’s efforts on inflation. It’s hard for a central bank to contain inflation when the Government increased its spending by a half in just three years. It’s even harder when the Government effectively closes the border to workers with more immigration bureaucracy than you can shake an expensive lawyer at.
It would be easy for Robertson to throw Orr under a bus. He could blame Orr for poor leadership, poor focus and, most importantly, poor outcomes. Inflation is out of control and the housing market is on a rollercoaster.
On leadership, there’s the haemorrhaging of senior staff. Last December Orr denied there was a problem at a Parliamentary Select Committee then, later the same day, put out a media release admitting that 10 out of 26 senior staff were leaving the Bank over a six month period. It’s one thing to lose half your managers, it’s another thing to pretend you’re not, it’s another thing again when your deflection lasts less than one day.
Ironically, this was after the Reserve Bank carried out an expensive review into New Zealand banks’ conduct and culture that found no smoking gun. Despite this wasteful misadventure, the resulting report was presented with a patronising lecture to the effect that banks should be careful lest they face problems in the future.
It seems that the Bank under Orr is always in trouble of some sort, and it’s never helped by the Governor’s over the top approach to communications.
The Governor at his best is colourful, but indulgent and unfocused at worst. His analogies where the financial system is a forest and his organisation happens to be Tane Mahuta, the god of the forest, are an excellent example of this.
In June he gave a speech to central bankers from around the world. Inflation is back to ravaging people’s savings after a 30 year absence. Central Banks around the world are taking it very seriously, see U.S. Fed Chair Jerome Powell’s recent speech.
New Zealand’s Governor gave a speech entitled Why we embraced te ao Māori. The speech gives a potted history of New Zealand then goes on to canvas issues such as why Māori business ownership rates are low.
These are things the Bank can’t influence. They would be a distraction from price and financial system stability if it could. One thing that does disproportionately affect Māori is the Bank’s failure to contain inflation. If you are poorer and have fewer assets, inflation is very bad but the speech does not mention this.
That inflation outcome is more worrying than any poor leadership or focus. New Zealand now faces the highest Consumer Price Index inflation in 32 years. As we go to press, it appears the Governor’s current tightening cycle has not faced down inflation expectations.
Commentators are now anticipating the OCR, and mortgage rates, will have to be raised higher than previously signalled. All the while, this inflation is doing enormous damage with New Zealanders identifying the ‘Cost of Living’ as their number one concern.
Besides CPI inflation, there’s record asset price inflation. Even with the borders closed the median house price jumped 50 per cent or $308,000 from March 2020 to November 2021 off the back of ultra low interest rates. The effect of such an increase on younger New Zealanders in particular is demoralising, as they watch their future get further away.
The Bank, under the Governor’s leadership, has massively miscalculated the required monetary policy response to COVID-19 and New Zealanders are literally paying a high price for it.Even before COVID-19, the Bank was at loggerheads with commercial banks over capital ratio requirements. The capital ratio is the amount of their own money shareholders in a bank invest versus money from depositors that is loaned on to other customers.
Increasing the capital ratio means more capital invested by shareholders, meaning demand for bigger dividends, meaning higher interest rates for borrowers. The bank claimed that having more capital would save the banks from running out of cash in hard times.
The increased requirements were announced before COVID struck. Then it struck and the requirements were delayed. Weren’t they needed for hard times? Now that the banks have made it through the Government without the requirements. There is no logic.
For all of these reasons, poor leadership, poor focus, and poor outcomes, New Zealand needs a new Reserve Bank Governor.