It did not come as a complete surprise when Adrian Orr resigned as Governor of the Reserve Bank – it was clear there was tension between him and the government.
Peter Nicholl
But the abrupt manner of his departure was a huge surprise.
The three areas of contention were the bank’s policy performance and its huge growth of spending under Orr’s Governorship, and the capital requirements it imposed on trading banks. Battling with the government on three fronts at the same time is always likely to be difficult and risky for anyone. In my view, Adrian Orr was battling on very shaky ground on the first two issues. I have more sympathy for his views on the third issue.
The bank made three major monetary policy mistakes during Orr’s seven years as Governor.
The first was, faced with the shock and uncertainty of the impacts of Covid on the economy, lowering interest rates to ridiculous levels and pumping huge amount of liquidity into the banking system. Adjusted for the size of our economy, the liquidity injections in NZ were some of the biggest in the world.
Adrian Orr
The bank called this a policy of ‘least regrets’. Unfortunately, the real regrets arising from this policy came through in the form of a surge in house prices and the return of inflation. But it was possible to foresee that these things would happen when you take interest rates to very low levels and pump a lot of money into the economy.
I actually invited myself to give a talk at the bank in 2020 and said just this. About 100 bank people attended my talk (not Governor Orr). Only one person argued with me – but the rest clearly didn’t agree as they kept on doing the same things.
The second mistake was bring too slow to react when inflation began to reappear. Instead, the bank continued for a while to pour more fuel on the emerging inflation embers. It did eventually get inflation back under control, though the main reason inflation here has come back within the bank’s target range is that overseas inflation rates have fallen.
The third policy mistake banks has been criticised for is moving interest rates down too slowly over the last two years. In my view, this criticism is the least valid of the three policy criticisms.
Staffing levels and expenditure at the bank increased during Orr’s period as Governor. The figures are truly extraordinary. A more appropriate word would be outrageous. Staff numbers rose over 200 per cent. New departments and divisions were created. A division called Strategy, Governance and Sustainability apparently has 69 staff. I can’t imagine what they all do.
The bank has to negotiate a five-yearly funding arrangement with the Minister of Finance. I was involved in the first two of these negotiations when this arrangement started in the late 1980s. The first Minister of Finance the bank negotiated with was David Caygill. He allowed the bank growth of one per cent a year in our expenditure. The second negotiation was with Ruth Richardson. She reduced the one per cent to zero – for five years. The bank operated without problems within these tight funding limits. But during Adrian Orr’s period as Governor the RBNZ’s annual expenditure rose by over 150 per cent.
It is in the midst of negotiating another five-yearly funding agreement with the finance minister. Apparently, it sought an increase in its funding limit. They – and it is not only Adrian Orr, but also the whole bank board – must be completely tin-eared. The government is trying to cut expenditure and have made some big cuts in many agencies. The bank has been through a period of more than doubling its expenditure – and asks for more. I am not surprised these funding negotiations went badly.
I am less familiar with the details of the discussions relating to bank capital requirements. But there are two points that lead me to be sympathetic towards the bank view. First, banks are the most systemically important privately-owned organisations in a country, yet they operate on the lowest capital ratios of any private sector companies.
Second, during my long career as a central banker and a central bank advisor I have worked in a number of countries that have had bank failures. They are always very expensive and very disruptive and best avoided. In this area to be criticised for being too cautious may not actually be something a central bank governor should try to avoid. To be criticised for being too easy in this area is certainly something a central bank Governor should avoid.
