You will undoubtedly have seen (and certainly felt) the steep curve of inflation over the past few years. We just hit 7.3% inflation, and we’re not out of the fiscal woods yet – or even anywhere near the treeline. The Official Cash Rate, which has historically been used to try and squash inflation, is expected to leap again by at least 50 basis points from 2.5% in August. ANZ is calling a peak of 4% by the end of 2022, up from their previous expectation of 3.5%.[i]
All this to say, the Reserve Bank of New Zealand (RBNZ) has failed to provide the one thing central banks should – price stability.
There were warning signs of the RBNZ, among other central banks globally, not tackling inflation correctly as far back as 2019. In a publication released by the New Zealand Initiative (NZI) earlier this week, Graeme Wheeler (Adrian Orr’s RBNZ predecessor from 2012-2017) weighed in on some of the reasons why. Main themes included overconfidence, overly positive modelling, and a conflict in the RBNZ’s very purpose.
Inflation happens when you have too much money chasing too few goods. And while we could blame covid for a while, the supply shock from that is by no means the only (or biggest) driver of the situation we find ourselves in now.
Long before groceries and fuel became astronomical (and even before covid) we could see the beginnings of a storm brewing in the housing market. In the year ending March 2020, 89.2% of all lending was dedicated to housing.[ii] Why? Because the policy and actions of RBNZ encouraged bank lending, in order to encourage spend and investment (and therefore artificially stimulate the economy). The Funding for Lending Programme (FLP) was designed to lower interest rates, by making banks less reliant on wholesale borrowing. The idea is that banks borrow from the RBNZ directly at the official cash rate, and they pass these savings on to their own customers.[iii]
You might see the problem with this now, given the OCR is also rising rapidly.
Another issue with RBNZ policy identified by the NZI is their dual mission to maintain both a stable level of general prices over the medium term, and to support maximum stable employment. This begs the question, which is the priority? Should the RBNZ lower inflation to stabilise prices, or should they lower interest rates to support employment growth? One mission does not support the other – and if the base mission of the RBNZ is so conflicted, you can see how murky policies emerging from such may be.
Then there’s the insincere integration of Māori values into the RBNZ’s monetary policy. As Dr Oliver Hartwich put it, “By claiming that his Reserve Bank follows Te Ao Māori principles, the Governor implicitly holds Māori responsible for these outcomes.” This is just another example of the RBNZ losing its core focus – Māori are one of the groups worst effected by the cost-of-living-crisis, and should not have to also suffer the appropriation of their traditional knowledge when it does nothing to serve them.[iv]
Let me be clear – there’s a wide gamut of those calling out the RBNZ and Adrian Orr’s mismanagement of it. Only one of six living Reserve Bank Governors has yet to criticise Orr. National’s Christopher Luxon has requested a full independent review of their performance before Orr’s reappointment, which would see him in the role for another five years. This would be odd timing for reappointment, as it’s right before a potential change in government – and sitting governments don’t typically appoint independent roles during this time. This review request has been rejected by Finance Minister Grant Robertson, who cited a pre-covid review as being recent enough.[v]
Considering the current inflatory climate, it doesn’t seem particularly prudent to depend on the review from prior to the huge cash injections of 2020 and 2021. In this instance, the RBNZ cannot be solely blamed when our own Government has been forging ahead unchecked with its expansionary spending.
Adding to the RBNZ’s woes is the slew of resignations they have faced over the past year. At December 2021, it was confirmed that a third of the most senior staff in the RBNZ had left or were in the process of doing so.[vi] Mind you, that usually doesn’t happen when people have confidence in their organisation – only three of these vacancies were the result of a post-review restructure, meaning the majority jumped ship of their own volition. Even those affected by the restructure reportedly had opportunities to stay within the central bank, but chose not to.[vii]
That speaks volumes. A job with the RBNZ used to be the pinnacle of one’s career – not anymore, apparently.
The new RBNZ board has a wide range of skill and diversity, but seems light in the areas of economics and banking. Those areas, as you may imagine, are fairly crucial to their activities. There’s also a certain irony to the RBNZ holding – and weilding – regulatory power over the governance of banks, when they refuse to look into their own. For example, in March 2021 the RBNZ instructed Westpac NZ to commission an independent report, essentially to justify whether their board and management had sufficient expertise in critical areas.[viii] There’s something to be said about those in glass houses...
Everyone takes a hit when inflation runs rampant – especially those who were already doing it tough. Hindsight is 20/20... but it seems unlikely, given the volume of issues cited with the RBNZ’s policy and activity, that there was not a point where even Adrian Orr thought, “Have we gone about this the right way?”
Putting your head in the sand is one of the worst things you can do in the face of financial challenges. This is true for individuals, and it’s certainly true of the central bank.
· Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawkes Bay and Wellington-based CEFEX certified financial planning and advisory firm.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgro
[i] https://www.interest.co.nz/business/116801/anz-economists-have-changed-their-call-and-now-see-higher-peak-4-ocr-and-say-75
[ii] https://businessdesk.co.nz/article/opinion/housing-an-avalanche-of-money-and-rbnz-policy
[iii] https://www.rbnz.govt.nz/monetary-policy/monetary-policy-tools/funding-for-lending-programme
[iv] https://www.nzinitiative.org.nz/reports-and-media/opinion/new-opinion-258/
[v] https://www.interest.co.nz/borrowing/116909/national-wants-review-reserve-banks-inflationary-money-printing-decision-governors
[vi] https://www.interest.co.nz/public-policy/113782/reserve-bank-confirms-10-its-26-most-senior-staff-are-leaving-says-three
[vii] https://businessdesk.co.nz/article/finance/rbnz-confirms-10-senior-staff-going-or-gone-since-june
[viii] https://businessdesk.co.nz/article/opinion/rbnz-board-appointments-double-standard-at-work
