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Changing the monetary guards

Published in Insights, The New Zealand Initiative’s newsletter, 29 March 2018

This week, the Reserve Bank finally got a new Governor. Adrian Orr, formerly chief executive of the Super Fund, replaced caretaker-governor Grant Spencer.

So first of all, congratulations to Adrian Orr who gave up the best-remunerated job in the public sector to serve as the Reserve Bank’s Governor for the next five years. With his financial experience in both public and private sector, he is the most obvious person the Minister of Finance could have chosen.

But beyond this changing of the guard, more significant reforms of our top monetary institution are on the horizon.

The first is the inclusion of ‘employment’ in the agreed targets for the new Governor. Though this deviation from orthodox monetary policy created a lot of noise, I believe that in practice it will not amount to much (if any) change. My NBR column this week explains why.

A more significant change will be the establishment of a monetary policy committee. Under current arrangements, the Governor alone is responsible for monetary policy. In the future, interest rate decisions will be made by majority decision in a committee.

Past Governors usually consulted with the Reserve Bank leadership. Adapting the single-person decisionmaker model to this reality is therefore not a huge step.

What will be much more problematic is the planned inclusion of external members in the new monetary policy committee. It will be difficult to find candidates for these roles who are qualified, available and non-conflicted by their other jobs.

But even if such people can be recruited (hard enough in a small country), it leaves a question of accountability. Establishing clear responsibility for achieving the Reserve Bank’s targets was the main reason given in the late 1980s for introducing the single decisionmaker model.

Adrian Orr has his work cut out. He will migrate the Reserve Bank towards a changed operating model while having to maintain its credibility for keeping prices relatively stable (depending on whether you regard an increase in the consumer price index by 49 percent over the past two decades as a sign of price stability).

It is not a straightforward task and it will require all of Orr’s economic understanding and political skills. We wish him well for the coming five years.

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