Focus now on Bollard's successor

By Brian Fallow

Alan Bollard has had to contend with a big boom/bust cycle but has managed to keep inflation on average within his target band of 1 to 3 per cent. Photo / Mark Mitchell
Alan Bollard has had to contend with a big boom/bust cycle but has managed to keep inflation on average within his target band of 1 to 3 per cent. Photo / Mark Mitchell

Alan Bollard's announcement that he will not seek a third term as Reserve Bank governor will trigger speculation both about who might succeed him and about possible changes to the policy targets agreement between Government and governor.

The names being bandied about already include:

* Deputy governor Grant Spencer, especially in light of heightened interest in macro-prudential policies and instruments to be added to the bank's toolbox.

* Assistant governor John McDermott, who heads the bank's forecasting operation and is a former chief economist at the National Bank.

* Adrian Orr, a former deputy governor who is chief executive of the New Zealand Superannuation Fund.

* Rod Carr, vice-chancellor of Canterbury University who was acting governor between Don Brash and Bollard.

However, Bollard's appointment in 2002 was seen as coming out of left field, not just because he already had a good job as secretary to the Treasury but also because his background was in micro-economics and he was not part of the priesthood of central bankers.

A change of governor is an opportunity to revisit the policy targets agreement and as a matter of course officials at the Treasury and Reserve Bank are reviewing it.

The Treasury's review will include such questions as whether consumer price inflation is still the appropriate target and if so how strictly it should be targeted.

It will consider whether greater weight should be put on asset prices, the use of macro-prudential instruments, and whether monetary policy decisions should continue to be the sole responsibility of the governor or made by a committee.

A review of New Zealand's arrangements by celebrated monetary economist Lars Svensson in 2001 recommended the move to a committee but both major parties at the time rejected the idea.

BNZ chief economist Tony Alexander said that while a committee and the publication of its minutes gave the financial markets more words to chew on, it also increased the chances of confusion and misunderstanding.

Thus far so far Bollard has had to contend with a particularly big boom/bust cycle but has managed - just - to keep inflation on average within his target band of 1 to 3 per cent over that period.

The housing boom of the mid-2000s saw house prices double in the space of five years with spillover effects that were seriously inflationary. Reining that in was especially hard in a period when the world was awash with cheap money, with which the banks could fund fixed-rate mortgages. In the end it took an official cash rate of 8.25 per cent and the onset of a recession - which was quickly subsumed into the worldwide slump triggered by the global financial crisis (GFC).

In response to the GFC he slashed the official cash rate (OCR) to a record low of 2.5 per cent and current market pricing implies it will still be there when he leaves office on September 25, an earlier attempt to start pushing it back to more normal levels being reversed in the wake of the Christchurch earthquake last February.

In 2010 he published a memoir, Crisis, recounting the unfolding global financial crisis as it impacted on New Zealand, from the standpoint of the most central of insiders. In his last eight months at the central bank he will face a heightened level of risk that New Zealand will be sideswiped again by international events.

On the home front he will have to weigh the stimulatory effects of the rebuilding of Christchurch against the contractionary effects of belt-tightening by the Government.

Perhaps reflecting his background heading the Commerce Commission he has seemed to relish the Reserve Bank's regulatory role as guardian of the stability of the financial system.

On his watch its supervisory functions have expanded to non-bank deposit-taking institutions and the insurance sector.

He saw off an attempt by the major Australian-owned banks to outsource the supervision of the New Zealand banking system to the Australian regulator. And in the aftermath of the GFC the Reserve Bank has required the banks to reduce their reliance on short-term offshore wholesale funding.

DANGEROUS DECADE

* Alan Bollard was appointed governor in 2002 with a looser inflation target and a mandate to give growth a go.
* His first term was dominated by an outsize housing boom and a world awash with cheap money, rendering the Reserve Bank's brakes, as he said, "spongy".
* By the time the global financial crisis hit he had plenty of room to cut the official cash rate - by 5.75 percentage points.
* As well as the gravest financial crisis of the post-war era he has also had to contend with a major oil shock and in the past year the devastation of New Zealand's second largest city.

- NZ Herald

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