MNI: RBNZ Faces Post-Election Shakeup - Ex-Staffers

The makeup of the Reserve Bank of New Zealand’s Monetary Policy Committee and its dual mandate would face change if October’s general election leads to a change of government with the opposition National Party signalling desire for reform, former RBNZ staff and industry insiders told MNI.

Dissatisfaction with the RBNZ – particularly focused on its performance during the pandemic – has grown among economists, business and sections of the public aimed at the Reserve’s structure and the makeup of its Monetary Policy Committee. Former officials noted the committee’s lack of macroeconomic expertise has created an environment of conformity as it slashed rates to 0.25% in 2020 before hiking 11 times in a row to 5.25% with more tightening likely. (See MNI INTERVIEW: OCR At 5.5% Before Pause - Ex-RBNZ Deputy Gov)

Geof Mortlock, financial consultant and former financial stability advisor at the RBNZ, said the MPC lacks knowledge and authority to provide a meaningful check on the governor and on the Reserve’s senior management team.

“There's a lack of transparency – the minutes are planned and we don’t get speeches from the nonexecutive members of the MPC,” Mortlock told MNI. “I'm hoping we will see from a change of government – if there is one – a major change to the composition of the MPC and a greater emphasis on accountability.”

Nicola Willis, the National's finance spokesperson and deputy leader, criticised the reappointment of Governor Adrian Orr last year, calling for an external review of the Board’s independence, while Leader of the Opposition Christopher Luxon wants to end the dual mandate that puts “maximum sustainable employment” alongside the price stability goal. Willis also recently expressed concern over the Bank’s lack of staff focused on “core economics.”

Recent polling puts the Nationals and their Act NZ partners neck-and-neck with the governing Labour/Greens ahead of the election scheduled for Oct. 14.

Mortlock noted the MPC was underqualified for its task.

“That was by design, following the bizarre agreement between [Finance Minister] Grant Robertson and Adrian Orr, which… stated external members would not be macroeconomists,” he added. “That’s kind of like saying a panel of experts on surgical policy at a hospital should not be doctors.”

In 2019, Robertson agreed with the RBNZ board and the Treasury that macroeconomists should be excluded from the MPC to manage conflicts of interests. The minister retained the policy in 2022.

SINGLE FOCUS

Grant Spencer, adjunct professor at Victoria University of Wellington and former RBNZ deputy governor, said the Reserve should return to the single focus on price stability it had between 1989-2018. “I think it worked well in the past and if [the RBNZ] stays with the dual mandate, then the price stability objective should have a degree of primacy over the sustainable employment objectives,” Spencer said.

Employment will play a major role in Reserve thinking irrespective of whether it appears in the mandate, he noted.

“The labour market is always taken into account by any central bank. It’s not like the RBNZ ignored employment before 2018 – quite the opposite, but it has to be clear about its long-term objective, which is price stability.”

PANDEMIC PROBLEMS

The RBNZ eased too much over the pandemic years and continued providing support despite New Zealand’s Covid-19 free status and relatively unaffected economy, compared to peer countries in Europe and North America, according to Eric Crampton, chief economist at private think tank the New Zealand Initiative. The National’s Willis was board director at the think tank between 2016-2017.

Crampton believes the RBNZ should have changed tack earlier when it became apparent the shock to the economy would not be as strong. “The bank lost focus on its core business, it started devoting a lot of internal resources towards areas that might have been seen as peripheral, such as research into climate change,” he said. “[The RBNZ] lost a lot of experienced staff.”

Spencer said potential reform of the MPC would allow for diverse opinions and greater transparency. “Individual members should be able to speak out more along the lines of the U.S. Federal Reserve, for example,” he added. “Decisions will still depend on the situation of the time, and also the interaction of the personalities sitting at the table.”