Bernard Hickey: We need to argue about money

Graeme Wheeler has had to backtrack on last year's interest rate rises. Photo / Mark Mitchell

Group-think can be a dangerous thing for any organisation. Just ask the shareholders and workers at Volkswagen, who have watched aghast over the past fortnight as the company's reputation was shredded and its share price collapsed by 30 per cent after revelations of its use of secret software to trick US regulators about nitrous oxide emissions.

Critics have pointed to Volkswagen's insularity, the dominance of engineers in its management and a lack of robust and independent directors on its board for the actions that resulted in corporate disaster.

Governance matters, which is why it is worth challenging the Reserve Bank's interest rate-setting structure to see whether it suffers a similar insularity and group-think.

Governor Graeme Wheeler is the sole monetary policy decision-maker.

He is accountable to the bank's board and, ultimately, to Finance Minister Bill English.

Criticism is growing over Wheeler's decision to put up the Official Cash Rate by 100 basis points between March and July last year. He has had to unwind almost all the hikes after the bank's inflation forecast repeatedly failed to materialise. Unemployment is rising - some expect towards 7 per cent.

Although he has refused to admit any mistake, Wheeler addressed criticism with a detailed description of how decisions are made. He said as many as 35 officials presented forecasts and scenarios during a three-day session before a committee of 12 officials. Two outside advisers provided advice to a decision-making committee of Wheeler and three assistant governors. Wheeler said in the past 10 years the committee had never rejected the consensus of the officials and advisers.

The Governor's explanation suggested a rigorous and robust debate. But the public has no way of knowing, and the Reserve Bank does not publish the minutes of that meeting, or the advice it received.

Other central banks often record the dissenting voices of members. These expert dissenters often make detailed arguments in public about why their central bank's decisions were wrong.

The market understands this contest of ideas and evidence and it hasn't damaged banks' reputations. The Bank of England, for example, has four experienced and high-powered external economists on its committee.

The Reserve Bank's two external advisors, company director Tony Caughey and former Federated Farmers chief Conor English, don't have the same ability to argue forcefully and in public with the bank as economists. They are also not decision makers on the committee and are appointed by the bank, rather than an external body.

The closest thing to a robust debate this year has come from English, who let slip in an interview that he would soon be asked awkward questions about why inflation was stubbornly below the 2 per cent target.

It's time the Reserve Bank was regularly asked awkward and searching questions by economists who also have a say in a true committee decision on the OCR.

And we should read about that debate and the decision in meeting minutes - otherwise the Reserve Bank risks becoming an insulated institution in danger of a collective group-think towards bad decisions.