Why National can’t afford true RBNZ independence

Adrian Orr’s surprise departure is not that surprising when you consider how the 35-year-long convention of not putting pressure on the Reserve Bank has been repeatedly breached. Now long-time Chair Neil Quigley has followed Orr out the RBNZ doors. Photo: Lynn Grieveson / The Kākā

Briefly in this deep-dive below on the political economy of Reserve Bank independence:

• A debate is now raging around the Government’s pressuring of the Reserve Bank on interest rates and bank capital policies, along with the opaque and messy exits of both its Labour-appointed Governor, Adrian Orr, and its long-time Chairman, Neil Quigley.

• Both Finance Minister Nicola Willis and PM Christopher Luxon have breached the 35-year-long convention of not putting pressure on the Reserve Bank, which was designed to maintain a reputation for independence. They have breached the convention repeatedly and both before and after getting into power.

• They started breaching it before they were elected by opposing the re-appointment of now-departed Orr and being hyper-critical of his actions while Governor during Covid. They crossed the rubicon by suggesting sacking him and effectively engineered his exit by slashing his Budget more than 20%. Current Deputy Prime Minister David Seymour openly called for Orr’s removal.

• Willis and Luxon then allowed a cover-up of the circumstances of Orr’s exit. When it was exposed, they used the opportunity to completely reset the leadership of the Reserve Bank by throwing Quigley under the bus.

• The current National-led Government has painted itself into a corner by lashing its future to economic growth this year and next year, and by focusing its entire economic strategy on reducing interest rates.

• That meant when the economy didn’t cooperate and the housing market stalled, the Government had no choice but to exercise pressure both publicly and privately, through its words and actions. It bet its future on lower interest rates driving the economy, rather than any substantial structural reform.

• There is more to come, with the potential for further jawboning of interest rates lower by the Beehive and the watering down of the long-running (but initially temporary) Loan to Value Ratio (LVR) restrictions and the Orr-orchestrated Debt to Income (DTI) multiple restrictions, just in time for a pre-election housing market boom in 2026.

• In the long run the risks are, as pointed out by RBNZ Chief Economist Paul Conway via The Kākā last week, that Governments that meddle with monetary policy end up with higher inflation and interest rates.

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When you promise ‘growth, growth, growth’ and bet that lower interest rates alone will produce it, it’s only natural and necessary to want the owner of interest rates, the Reserve Bank, to help deliver that growth when it doesn’t arrive on schedule.

The trouble is that’s not how Aotearoa’s political economy has operated for 35 years. The 1989 Reserve Bank Act created the world’s first truly independent inflation-targeting central bank. Finance Ministers and Prime Ministers in particular, and elected politicians in general, were very careful, until November 8, 2022, not to sharply criticise the bank or its staff over policy.

That all changed when Willis and Luxon wrote to then-Finance Minister Grant Robertson opposing his re-appointment of Orr for a second five-year term. Find out more about that from this piece I wrote the next day:

Willis and Luxon kept criticising Reserve Bank policy and Orr once in power, encouraging back-bench Government MPs to call for Orr’s tougher capital requirements to be junked, and, as we learned last week, pressuring the RBNZ to cut interest rates even more than it did last month.

The economy’s failure to fire this year has ramped up that pressure in recent months as it became clear growth stalled in the second quarter and house prices were going backwards again. Without structural reforms to boost growth, the Government is now reliant on the short term proof of growth in the economy. Given its initial freezing of Government capital expenditure on transport, hospitals, housing and water infrastructure in late 2023 and early 2024, it has put all the pressure on a Reserve Bank monetary policy easing to achieve that growth. When the growth didn’t arrive, the pressure had to ramp up.

The first fruit of this pressure was the bank’s decision last month to water down the Adrian Orr-created toughening of capital requirements. The changes mean that over the next two years the big four banks will have the ability, if they want to, to engineer an extra $175 billion worth of bank lending into the housing market.

The next avenue for Beehive activism is likely to be around the LVRs, which the previous National Government opposed and were the reason they subsequently refused to re-appoint their creator, then-Reserve Bank Governor Graeme Wheeler. Willis reluctantly agreed early in her term as Finance Minister to Orr’s proposal for a DTI, which was subsequently imposed from July 1 last year.

Both the LVRs and the DTIs are now in the firing line.

One of Willis’ most significant actions around the Reserve Bank this year was the appointment of former Reserve Bank Deputy Governor and Acting Governor Grant Spencer as a director of the board on July 1. Spencer’s most significant move in his short period in charge was his November 2017 decision to loosen the LVR restrictions.

Spencer is the strongest candidate to be the new Chair of the board.

‘Cut the spin and stop trying to play 4D chess. It isn’t working. The Reserve Bank board and Willis have engaged in what looks like a cover-up of the circumstances surrounding Adrian Orr’s resignation as Governor in March.’ Jenee Tibshraeny for NZ Herald-$ (gift link): Cut the spin, Nicola Willis and Reserve Bank

Nine years – Neil Quigley was Reserve Bank Chair for nine years until resigning with immedate effect last Friday night. Nicola Willis then went on to give interviews over the next day saying she would have sacked him if he hadn’t resigned.

Small worlds at dawn. Photo: Lynn Grieveson / The Kākā

Ka kite ano

Bernard