Steven Joyce: Grant Robertson risks undermining Reserve Bank independence

Reserve Bank governor Adrian Orr (left) and Finance Minister Grant Robertson. Photo / Mark Mitchell

OPINION:

The Reserve Bank is one of New Zealand’s most important economic institutions. It has the crucial job of setting interest rates to regulate economic activity and ensure price stability. Price stability is in turn important for encouraging sound investments and preventing inflation from eroding the spending power of the country’s citizens.

This is foundational stuff for any economy and society. It’s a technocratic job, but its impact is highly political. It doesn’t get much more core to people’s wellbeing than their standard of living and their spending power.

Monetary policy operates on a time delay, so often it appears the sensible decisionmaker is a killjoy, taking away the punchbowl just as the economic party is getting started. That’s not a popular approach at any gathering.

Back when monetary policy was left to politicians, the temptation to goose the economy beyond its capacity at election time was often too great. Political cycles made economic cycles worse, with magical rip-roaring times prior to election day, and big hangovers a year or so afterwards as resurgent inflation had to be tamed. That’s why New Zealand was a world leader in removing the monetary policy remit from politicians and placing it in the hands of an independent entity.

And it’s worked well. So well that with the help of the price stabilising effects of trade globalisation, a generation or two has been able to largely forget about inflation and central bank governors. Until that is, the last three years.

The economic response to the pandemic has reminded everyone of the power wielded by central bankers. The extreme monetary loosening and belated monetary tightening have created big swings in prices, asset values, and economic activity. There have been stark winners and losers, none more so than those who were encouraged to get out and buy houses when prices were high, only to see their equity evaporate before their eyes now, and their mortgage costs soar.

Little wonder then that two announcements this week are drawing a lot of attention, the reappointment of Reserve Bank governor Adrian Orr for another five years, and the bank’s own review of its performance over the last five years. Both are rightly up for discussion.

I’d describe the bank’s review as “a start”. For those of us worried the Governor appeared to brook no criticism or suffer self-doubt, there is some encouraging acknowledgement in the report that the bank could have done some things better. It makes clear they probably should have started tightening monetary conditions earlier, although they water that down by saying it was a hindsight call despite plenty of people proffering that advice at the time. They also acknowledge they should have given themselves more room to stop lending cheap money to banks long before now.

There is much more that needs to be debated off the back of this review. The bank suggests it will use quantitative easing in future. It would be great to see some language suggesting it is “a last resort”. There also needs to be far greater discussion about the impact of monetary policy decisions on asset prices, and when that becomes destructive to investment decisions. And could the bank have capped the ultimate destination of interest rates by stepping in earlier?

Given the highly experimental nature of many of the decisions made over the last three years, and the new shape of the bank after the last set of reforms in 2018, it would make sense to independently review the bank’s approach alongside a wider review of the economic response. But given the Government’s tardiness on a general inquiry into the Covid response, I wouldn’t hold my breath.

It doesn’t help that Finance Minister Grant Robertson’s response to the review was it was evidence the Bank “got the big decisions right” when that’s clearly not the case. Say what you like about the notwithstandings, extenuating circumstances, and who else also got it wrong, but inflation this far outside the required band, (including food inflation now in excess of 10 per cent), and the need for sudden rapid increases in interest rates is not “getting it right”.

Which brings us to the second announcement of the week, the reappointment of the Reserve Bank governor by Robertson for another five years in charge. That is not a surprise, but it is troubling.

Because of the bank’s importance and independence, the appointment of the governor is supposed to be a non-partisan decision that both sides of politics can live with. For whatever reason, it is clear that for the opposition parties and many independent commentators that is not currently the case.

A sensible Finance Minister concerned for the independence of the institution would have either appointed a new governor or reappointed the current one for a shorter term. It would have been entirely reasonable to make a two-year extension, say, until the current crisis is passed, and then appoint a new governor for the next stage of the bank’s evolution and the next economic cycle.

I should stress this criticism is directed at Robertson. It is Robertson who appointed Orr and the buck stops with him on Orr’s reappointment. It is also Robertson who implicitly and explicitly extended the bank’s remit to focus on housing, employment, climate change, Māori issues, and the economy generally. As Finance Minister he has never once publicly said the bank should focus on price stability alone and leave the rest to the Government.

This in itself is endangering the political independence of the bank. The more it is inserted into activities outside macroeconomic policy, the more reasonable it is for people to take a political position on what it is doing and saying.

It has been convenient for Robertson to set the bank up with a broader brief. It has enabled him to crank up spending and make policy decisions that arguably hold the economy back, while abdicating economic responsibility for those decisions and charging the bank with looking after the downstream effects.

However, we are currently experiencing a salutary reminder of the reach and importance of monetary policy and the critical but circumscribed role of an independent central bank in a successful economy.

The Finance Minister should be taking steps to reinforce the bank’s focus, its independence, and the broad-based support for it as an apolitical institution. At the moment he risks undermining it.

- Steven Joyce is a former National Party Minister of Finance. He is director at Joyce Advisory.