In response to criticism of the Reserve Bank’s performance over the past four years, the Prime Minister and the Minister of Finance have accused critics of applying ‘hindsight economics’.
Nothing could be further from the truth. The New Zealand Initiative has been consistent in its warnings of loose monetary policy, the RBNZ’s loss of focus on price stability and its preference for stimulus.
To put the record straight, here are just some examples of how the Initiative has commented on RBNZ policy since 2018.
When Adrian Orr became appointed Governor, the Executive Director Dr Oliver Hartwich commented in the Initiative’s Insights newsletter of 29 March 2018:
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.
After its surprise 50 basis points OCR cut in August 2019, and after a series of highly political interventions by Governor Orr, the Initiative published a research note, The Unreserved Bank of New Zealand: Why unorthodox monetary policy needs boundaries. It was co-authored by Professor Robert MacCulloch, Dr Eric Crampton and Dr Oliver Hartwich and released on 13 August 2019:
As the Reserve Bank takes on fiscal functions, its political neutrality and commitment to monetary stability, as well as maximum sustainable employment, need to be re-emphasised. …
We are concerned about this changing paradigm for the RBNZ. The purpose of granting the RBNZ independence in 1989 was to enable it to pursue its task of ensuring price stability without regard to political considerations. In this way, it was following international best practice, most notably by the then equally independent and stability-focused German Bundesbank.
Because of this commitment to a clear and single goal, the RBNZ was predictable as an economic actor. It was also highly respected and stood above politics. We believe that it might lose these features should the current path continue. …
In summary, how the RBNZ is implementing its “dual mandate” when making interest rate decisions is unfolding as a mystery, exacerbated by the fact that the Governor has rarely spoken to this issue.
In a column in the National Business Review, our Executive Director highlighted the loss of qualified economists at the RBNZ (13 October 2019):
When challenged by Radio New Zealand’s Guyon Espiner on losing intellectual firepower at the bank, its Governor Adrian Orr responded: “Do we have a truly diverse and inclusive team or do we all look the same and think the same? This is what we’ve been doing at the bank in the past 18 months. Some people have chosen to continue on that journey. Some people were asked not to continue on that journey and that’s where we’re at.”
In other words, diversity and inclusiveness are the RBNZ’s response to an accusation of a perceived decline of competence.
Also reported in the National Business Review was a speech Dr Hartwich gave to the Financial Service Federation’s conference. On 17 October 2019, the National Business Review reported:
In August, the RBNZ decided to cut the Official Cash Rate to 1% from 1.5%, rather than the 25 basis-point cut the market expected. At the time, many analysts wondered if the RBNZ was more worried about the country’s economic health than it let on. But the central bank hasn’t provided much clarity since then.
“If Donald Trump is crazy, then I think we have a Reserve Bank that is losing the plot on so many issues,” Hartwich said.
“The way it delivered the cut was ridiculous because it didn’t prepare the markets. His justification was since a cut might be needed in the future, it might as well deliver that full cut today, which is completely idiotic.”
Orr’s public speculation on issues such as negative interest rates and potential quantitative easing is also concerning, particularly his position that use of such instruments is “fine and we should all get used to that,” Hartwich said.
In a research note (Deficit spending in a crisis: why there is no such thing as a free lunch) by Senior Fellow Dr Bryce Wilkinson, published on 22 April 2020, the Initiative commented:
Deficit spending is reasonable in a crisis but it should be responsible, restrained and prudently funded. It also needs to be stopped and reversed within a credible time frame.
Deficit spending funded by borrowing from the central bank that is not expected to be reversed is a route to financial instability and in the extreme, government default.
Large scale central bank purchases of government or private assets funded by credit creation are a more general source of potential financial instability. These are dangerous instruments because their costs and risks are hidden.
They also involve the central bank in matters that are essentially fiscal, undermining its legitimacy as a politically impartial monetary policy functionary.
A good fiscal constitution should constrain politicians from deciding to fund deficits by borrowing from their central banks. Transparent, non-inflationary funding of fiscal deficits is much safer.
Commenting on the Reserve Bank’s monetary stimulus in a New Zealand Herald column, Dr Hartwich wrote on 27 May 2020:
On top of this is the slow merging of fiscal and monetary policy. The Reserve Bank has signalled it would monetise government debt if it is asked and it has already started a large quantitative easing programme, which Governor Adrian Orr has indicated could be expanded if needed.
None of this will improve international confidence in the NZ dollar. Nor will ratings agencies appreciate hearing about plans for the Reserve Bank to take on large chunks of government bonds.
New Zealand must be careful not to look like it is pursuing anti-trade, anti-investment, anti-monetary and anti-fiscal stability policies. Otherwise, international markets may conclude that Paul Keating’s warning [“We will just end up being a third-rate economy, a banana republic.”] applies to New Zealand.
New Zealand must remain clean, transparent and solid in all its economic institutions. We are not a banana republic, and we do not want to become one.
In a research note (Doing whatever it takes with someone else’s money), the Initiative’s Senior Fellow Dr Bryce Wilkinson wrote on 12 June 2020:
New Zealand is now on a dangerous path to higher public debt and unprecedented money printing with no credible plan for unwinding the situation before the next crisis. …
RBNZ Governor Adrian Orr is widely seen to have effectively publicly invited the elected Government to legislate to enable or instruct him to directly fund its fiscal deficit. He was quoted saying “[t]here’s no right or wrong” about directing monetary policy at funding fiscal deficits rather than at meeting an inflation target. He even expressed the RBNZ’s capacity to do so in cavalier terms, “I’ve got the ATM.” In the same interview he was explicit about his willingness to implement such a policy. …
Loose talk from the RBNZ about funding government spending by printing money risks ending the monetary and fiscal constitution that has served the country well from the early 1990s. The RBNZ needs to be much clearer about what it is saying about its future independence and the separation of responsibilities for monetary policy, funding the fiscal deficit and managing the Crown’s balance sheet. The optimal term structure for public debt is fundamentally a Crown balance sheet issue. The RBNZ also needs to be much clearer about why it believes the benefits to the public from purchasing up to $60 billion of government bonds to reduce interest rates and smooth the yield curve.
In a New Zealand Herald column on 28 May 2021, Dr Hartwich wrote:
Reforms of the past have been undone by a Government imposing non-monetary goals on the RBNZ and a complicit RBNZ leadership all-too-willingly accepting new roles as demi-politicians.
If experience is anything to go by, the new RBNZ era will end in tears and inflation and it will take another Minister of Finance, and another RBNZ Governor, to clean up the mess.
On 4 June 2021, Dr Hartwich warned in the Initiative’s Insights newsletter that the Reserve Bank was now planning to use its inflated balance sheet to buy climate change-related bonds instead of reducing the balance sheet to counter threats to price stability:
It is indeed no surprise that the RBNZ is focussing on climate change. It does so in its regulatory role in financial markets.
However, what is new is that Rayner suggests the balance sheet itself may promote climate change policies. “There is also opportunity for central banks to take a step further to ensure their balance sheet operations actively support the transition to a low carbon economy,” she said.
The RBNZ has no formal mandate for climate policy. So far, it had always maintained that the purpose of QE was monetary policy.
Rayner’s speech confirms our biggest worries from two years ago. We were concerned that the vast sums under the control of the RBNZ would be too tempting to use to achieve other goals.
Should it come to that, it would mark another milestone in the ongoing politicisation of our central bank. From a Reserve Bank once celebrated for its focus on price stability and for its independence, it would have turned itself into a political institution.
With this long record of criticising the RBNZ’s monetary policy, warning of the inflationary dangers of unorthodox monetary policy such as quantitative easing and pointing out the distractions from the core target of price stability, talk of ‘hindsight economics’ is ludicrous.
The Initiative has consistently warned of the inflation scenario New Zealand is experiencing right now. It warned of these dangers even before Covid hit and before Russia invaded Ukraine.
Commenting on the monetary challenges facing New Zealand today, Dr Hartwich said:
“The Reserve Bank has lost sight of its most important goal: to deliver price stability. It needs to return to its roots as a stability-focused central bank. Otherwise, New Zealand will face inflation for years to come.”
Authors: Dr. Oliver Hartwich and Dr. Bryce Wilkinson