Mood of the Boardroom: Liam Dann – Is the Reserve Bank straying from its brief?

OPINION:

With inflation rising to peaks not seen since the 1980s the Reserve Bank has faced intense scrutiny over its pandemic monetary policy response.

Questions have been asked by senior economists — including former Reserve Bank of New Zealand (RBNZ) staff and the previous Governor — about the extent of the stimulus provided to support the economy and the timing of its withdrawal.

Others — including Finance Minister Grant Robertson — have suggested the criticism smacks of 20/20 hindsight. They point to enormous uncertainty caused by the pandemic, the RBNZ being the first major central bank to begin removing stimulus and its aggressive stance in the past 12 months.

While business leaders in the Mood of the Boardroom survey seem wary of laying blame directly and are divided over the extent of policy failures, they do overwhelmingly favour an independent review to assess the RBNZ's response.

Some 77 per cent said yes to the survey question about the possibility of an independent review.

Just 18 per cent said no and a further 5 per cent were unsure.

"The central banks globally overstimulated economies and we are now paying for it," said one company chair.

"Our RBNZ was probably no worse than some of the others but they printed too much money and kept printing it way past when they should have stopped."

This view was shared widely by respondents, although many noted that they didn't see the need for a review to target Reserve Bank Governor Adrian Orr or judge him for decisions made at the height of the pandemic crisis.

"This isn't about dumping on Adrian Orr, it's about reviewing how we responded to an economic and social shock on a scale never seen before, where the tools we have worked well, where they fell short and what, with the benefit of hindsight, we can learn from our response when (not if) the next shock comes," said one property company chief executive.

It may not be Covid or even a pandemic; but there would be another shock, he warned.

The review should include the Reserve Bank but also the Government's fiscal response, said one senior realtor.

"This is not critical of them but we have never had to face a crisis like this in recent years and we have to learn what worked or didn't.

"This is what most businesses do, don't they?"

"I don't look to allocate blame to the Reserve Bank in the ways others do — including how they are looking to connect purpose to Māori culture — which I am relaxed about," said Deloitte chair Thomas Pippos.

But others did express concern that the Reserve Bank was straying from its brief in developing policies around culture and climate change.

One business organisation leader argued that the RBNZ went "off the rails before Covid hit — and then it got worse in the pandemic."

"What is the Reserve Bank doing wading into areas outside their remit? Clawback immediately," said one respondent.

However, at the other end of the spectrum, there were some who questioned the value of a review.

"Hindsight is too easy to be clever with. If a review was to be undertaken it should be forward-looking with scenarios that are transparent to all," said an energy sector chief executive.

"We don't need this government (and their bureaucrats) doing any more reviews," argued another business organisation leader.

The Reserve Bank has already indicated that there are plans for a formal review underway — as part of its standard five-yearly process — and that this will include a report by independent international experts.

But National Party leader Christopher Luxon has said this does not go far enough and has called for a fully independent review.

Another National Party policy call — returning the RBNZ to a sole focus on inflation targeting — also appears popular with business leaders.

The Labour Party moved the RBNZ to a dual mandate — targeting unemployment and inflation in 2018.

Some 59 per cent of Mood of the Boardroom survey respondents said they supported a return to a sole focus on inflation.

But 30 per cent said no and 11 per cent were unsure.

"Dual mandates don't work," said one company chair.

"I suspect they did such a great job of keeping inflation in check for decades that there grew this belief that they could do two things at once (full employment and low inflation). Of course, we now see the folly of that."

Monetary policy was a single instrument and simply couldn't be used to hit two targets, argued a senior banker.

"One of most widely agreed principles in economics is that one needs as many policy instruments as targets."

Some, like Foodstuffs chief executive Chris Quinn, felt the RBNZ shouldn't be "solely" focused on inflation.

But he warned that housing should not be conflated with its core goals.

Others felt there was room for a broader approach.

"Inflation doesn't happen in a vacuum, and nor should policy setting to control it," argued a property sector chief executive.

"Inflation should be the primary focus, but I think 'having regard to' other factors is not just valid, but essential."