Monday 6 December 2021

A politicised central bank

Politik this morning reports that the Reserve Bank Governor has lost the support of the National and ACT Parties. Or, at least, they would not be keen on his being reappointed.

Now that Simon Bridges is National’s finance spokesperson, the future of Reserve Bank Governor Adrian Orr will be an issue.

Orr’s contract as Governor expires in March 2023, outside the three months prior to an election when Governments normally defer significant appointments.

But with the election expected in September that year, a move in March to reappoint him would be bound to be an election-year issue.

If the decision were to be left to ACT and National, Orr would go. Both ACT Leader David Seymour and Bridges confirmed that on a podcast last week, and Bridges has confirmed again to POLITIK that was his position.

But at the same time, Bridges has to be careful.

The Bank is supposed to be independent, and one of National’s criticisms of Orr is that he has allowed it to become a little less so under Labour and Finance Minister Grant Robertson.
And this is why Reserve Bank Governors ought to stick to monetary policy and why prudential regulation colonising other policy areas far outside of their proper domain without any evidential basis is risky.

Last week, we hosted John Cochrane to talk about central bank independence and the problems they can get themselves into. 

The video is here:


My column in our Insights newsletter summed it up:

Central bank independence matters.

The grand bargain struck between governments and their central banks, coming out of the turmoil of the 1970s, and led by New Zealand in the late 1980s, was simple.

Governments stopped meddling in monetary policy. Central banks were given operational independence to pursue low and stable inflation. It was a difficult bargain for governments who preferred to avoid interest rate hikes as elections loomed.

That independence required Banks stay within limited bounds.

Monetary policy and prudential bank regulation are powerful tools with economy-wide consequences. They need to be used only toward the core ends of central banking: low and stable inflation, and the stability of the financial system.

Straying to pursue other objectives, regardless of whether they match the goals of the government of the day, is dangerous.

On Thursday, the Initiative hosted a webinar with John Cochrane – one of the world’s leading experts working at the intersection of macroeconomics and monetary policy and financial regulation. That he has a stronger record of published work in this area than the entirety of the Reserve Bank of New Zealand is a safe bet. Whether he has three times the work in the area might depend on how you weigh pages in different journals.

John has been increasingly critical of worldwide moves by reserve banks to consider climate change as a risk to financial stability. While it is very clear that temperatures are rising and that sea levels will rise with them, with obvious consequences for storms and beachfront properties, evidence of risks to the financial system is wanting.

Not everything that is a globally consequential risk is also a risk to the financial system. Systemic financial risk requires a particular kind of fragility. And the financial system, here and abroad, simply appears to be robust to the kinds of shocks that climate change will bring.

Indeed, earlier this month, the Federal Reserve Bank of New York published work showing that storms increase, rather than reduce, bank profits. People take out loans for rebuilding. Storms are bad, but they are not a risk to the financial system.

Using prudential regulation to address political concerns takes the regulator’s eye off the ball. More substantial risks can be missed. But, more importantly, doing so politicises their operations, putting their independence at risk.

And that may yet be the biggest systematic risk of them all.

Shortly after the webinar, one of the RBNZ's board members decided to weigh in. Draw your own conclusions about the adequacy and rigor of governance at the Bank. 

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