A distracted Reserve Bank

Been a busy week here, and presumably also over at RBNZ.

Former RBNZ Governor Graeme Wheeler coauthored a report with our Bryce Wilkinson on global monetary responses to the pandemic, arguing that most of them took their eye off the ball. It took too long for them to flip from a GFC playbook to recognising that they were dealing with a real shock. They noted distractions from other political objectives, like climate change.

Their piece drew a fair bit of attention, including internationally. The piece wasn't about the RBNZ in particular, but they were subject to the same kinds of errors as others. 

Governor Orr put out a release claiming the Bank hasn't been distracted and that climate change, Te Ao Māori, and financial inclusion, "remain highly relevant to the Reserve Bank in achieving our legislative purpose of increasing economic prosperity and well-being for all New Zealanders."

Susan Edmunds over at Stuff asked me for comment.

But NZ Initiative chief economist Eric Crampton said the critics were driven by deeper concerns.

He said, if the Reserve Bank was not focused on its core jobs of monetary policy and prudential regulation, there was no one else who could pick it up.

He said the Reserve Bank had shed expertise in core economics in recent years.

“Friends in economics departments emailed me the Reserve Bank’s latest advertisement for summer interns, where the Reserve Bank seemed to want every diverse skill other than macroeconomics. The bank seemed to have stopped caring about core economic research, and had started pursuing other highly politicised agendas instead,” he said.

“Under governor Orr, the bank strayed considerably from its core mandate. While inflation was hitting the highest levels since inflation targeting began, the governor of the Reserve Bank was making international speeches on how the inclusion of a te ao Māori view encourages the bank to think holistically.

“It seemed, at best, tokenistic. At worst, it signalled to the international central banking community that the bank was no longer serious about its main job: that it had become too distracted from core business.”

Crampton said a bank that was seriously focused on targeting inflation should think about the implications of high inflation, or high unemployment, for Māori.

“Maintaining stable inflation rates is the best long-term way of ensuring maximum sustainable employment. But if their modelling showed that moves necessary for maintaining price stability would hurt lower income groups, or Māori in particular, knowing that would be important. It could then inform Parliament, so that Parliament could use its fiscal authority to ensure that maintaining price stability did not have unwanted distributional consequences.

“But that has not been the bank’s approach under this governor.”

Orr and the Bank have liked to paint critics as racists. It seemed to work - back when the Bank had clearly forgotten its One Big Job That No One Else Can Do, but inflation hadn't yet broken out. 

I don't think that play's going to keep working, now that failure's more obvious.

Orr's term comes due early next year. 

If they reappoint Orr, and National wins the election, things could get uncomfortable. 

I'd hope that there would just be a resignation. 

Reserve Bank appointments should be apolitical. Monetary policy should be apolitical. But Orr politicised the Bank. 

I'd hope that there can be cross-party agreement on a suitable appointment so someone is ready to take up the position when Orr's term comes due.

Arthur Grimes is also worth listening to.