Reserve Bank of NZ Governor Christian Hawkesby. Photo / Mark Mitchell
As the dust settles on the dramatic departure of Adrian Orr, what does the future look like for the Reserve Bank?
The Reserve Bank (RBNZ) faces a serious challenge on the monetary policy front as US tariff policy and global trade turmoil have upended what had looked like a relatively benign path of economic recovery.
It also faces a political challenge from a Government that sees it as having over-extended its brief on operational issues and has significantly cut its funding.
Finance Minister Nicola Willis has been explicit in the comments she has made around the RBNZ’s new funding agreement, warning that the bank was not being funded “to pursue pet projects”.
The departure of Orr has also opened the path for a review of the RBNZ’s bank capital rules, which were strengthened in 2018.
These rules were championed by Orr and were widely seen as another source of tension between Orr and Willis.
In theory, then, the departure of a governor could signal time for a strategic reset.
But there are some practical reasons why Orr‘s exit won’t translate to a major shift in direction for the central bank, at least not yet.
One reason is simply that it takes time to find a new governor.
Even the orderly departure of Graeme Wheeler in 2017 required a six-month interregnum with his deputy Grant Spencer in charge.
When a deputy takes the helm temporarily, they don’t have the brief to reshape the direction for the organisation.
For the next six months at least, the RBNZ will be led by Orr‘s former deputy, Christian Hawkesby.
Whether Hawkesby will be appointed long-term is far from certain.
It is widely expected that the board will conduct an expansive international recruitment process.
Hawkesby certainly comes with the baggage of the Orr era, which may be a handicap in the current political climate.
But he is also a very different kind of leader from Orr.
He’s quieter, more circumspect and probably more like the kind of governor that Orr‘s critics claimed he should be.
His credentials are strong.
Before joining the Reserve Bank of New Zealand, he was part of the team that established Harbour Asset Management.
Before that, he was at the Bank of England (from 2001 and 2010), where he held senior positions including private secretary to the Deputy Governor, chief manager of sterling markets and head of market intelligence.
Hawkesby started his career on the RBNZ’s graduate programme, straight after completing his university studies in 1998.
The bank has historically opted for external candidates. This may count against Hawkesby but, for the time being, he’ll ensure that there is continuity and stability at the bank.
It’s also worth noting that, since the Reserve Bank Act was amended in 2018, Official Cash Rate decisions have been made by the monetary policy committee rather than being the sole responsibility of the governor.
Recruitment is under way for a new external member to replace professor Bob Buckle when his term expires on September 30, 2025.
But for now, that committee, sans Orr, remains the same.
The board of directors, including chairman Neil Quigley, also remains relatively stable.
Two directors, professor Rawinia Higgins and Byron Pepper, will step down and be replaced at the end of June when their terms expire.
There have been some other staffing changes; in the past few months, two assistant governors have stepped down.
General manager of strategy, engagement and sustainability, Simone Robbers, announced last month that she was leaving after six years in the role.
Her resignation follows the departure of the bank’s general manager of information, data and analytics, Kate Kolich, at the end of March.
But essentially Orr‘s leadership team remains intact.
Paul Conway remains as chief economist and Karen Silk remains as Assistant Governor and general manager of financial markets and banking.
Even accounting for the former governor‘s force of personality and strong leadership style, there is no reason to assume we’ll see any dramatic change in strategic direction.
That doesn’t mean the monetary policy outlook will remain unchanged.
In fact, we may see a substantive shift in tone with the next Monetary Policy Statement due on May 28.
US tariffs and an escalating trade war with China have significantly changed the economic outlook.
At Orr‘s last public outing as Governor – the February Monetary Policy Statement – the RBNZ cut the Official Cash Rate by 50 basis points to 3.75% and published a set of forecasts that suggested the current easing cycle was nearing an end.
Its rate track implied another 25-basis-point cut in April (which was made) and one more in May.
After that, the odds were about even on a further cut, taking the rate to 3% by the year’s end.
Economists were divided on whether that last cut would be needed. Now they aren’t.
Liberation Day changed everything.
It would be pointless to try to summarise all the twists and turns in US trade policy since April 1 and it’s impossible to anticipate what might have changed between writing this and the words going to print.
Regardless, significant damage has already been done, not least to confidence in the strength of the post-Covid recovery.
Growth forecasts have been trimmed – both internationally and domestically.
The International Monetary Fund (IMF) projects that global output will slow to 2.8% this year from 3.3% in 2024. In January, the fund forecast that growth would hold steady in 2025.
Fitch Ratings has cut its world growth outlook in 2025 by 0.4 percentage points, and China and US growth by 0.5 percentage points.
China’s growth was forecast to fall below 4% this year and next.
Meanwhile, eurozone growth will remain stuck below 1%.
World growth was projected to fall below 2% this year, which would be the weakest since 2009, excluding the pandemic.
In the US, first-quarter GDP was negative, down 0.3%, and recession fears are growing.
Even if New Zealand skips the worst of the direct tariff impacts on its exports, it can’t be immune to that kind of slowdown for our major trading partners.
The IMF has cut New Zealand’s forecast growth for 2025 to 1.4% (previously 1.9%).
ANZ economists now expect the Reserve Bank (RBNZ) will have to cut the Official Cash Rate (OCR) to 2.5% as the economic recovery progresses at a slower-than-expected pace.
ANZ has also revised down its forecast for GDP and the housing market.
It expects annual average GDP growth of 1% for 2025 (down from 1.3%) and 2.6% in 2026 (down from 2.9%).
Even the best-case scenarios forecast by economists now see the OCR going below 3%.
Kiwibank recently published a scenario analysis on the fallout from the trade war.
Its worst-case scenario sees negotiations going badly and a return to something like the original Liberation Day reciprocal tariffs.
It also assumes that the standoff between China and the US remains largely unresolved.
That might require an emergency response from the RBNZ with rates being cut to 1.5% or lower.
But even its best-case scenario (which assumes negotiations go well and we get close to 10% tariffs across the board) suggests the OCR will need to go to 2.5%.
How the RBNZ reacts to all this gloom remains to be seen.
But what is clear is that central bankers find themselves trying to assess the impact of events that don’t have a precedent, at least not for decades.
Tariffs should theoretically be inflationary, adding cost to consumers, but if the net effect is an economic slowdown that dampens demand, then overall inflation may stay subdued.
Essentially, the US trade policy has delivered the world a supply-side shock, with additional costs on goods and a demand-side shock, and consumer and business confidence taking a heavy hit.
For countries like New Zealand that won’t respond with retaliatory tariffs, there shouldn’t be any direct inflationary impact.
Most economists believe that our biggest risk is on the demand side.
In other words, we probably face lower growth and a slower recovery than we had hoped for at the start of the year.
That doesn’t mean trade wars won’t push up the price of some goods, although in the short term, we’ve seen recession fears push oil prices lower.
It’s also possible we could even see the price of some imported products fall, as nations such as China look to offload excess goods that are no longer viable to sell in the US.
If that all sounds like a contradictory mess, it’s because it is.
There are so many variables that it remains extremely difficult to make accurate forecasts in this climate.
RBNZ chief economist Conway addressed this issue in a speech last month.
“I cannot overstate the conditionality,” he said of all published forecasts.
Conway would be well aware of the criticism the RBNZ faced over the rate track it published in May last year.
That track suggested the OCR would rise further and wouldn’t be cut until August this year.
As it turned out, the OCR was cut in August 2024.
Critics called it a U-turn and a flip-flop.
Orr rejected this and argued there was a fundamental misunderstanding around the way people were interpreting the rate track.
In his speech, Conway emphasised that the track “should almost never be interpreted as a guarantee of future Monetary Policy Committee decisions”.
While not an acknowledgement that the RBNZ got it wrong, Conway’s speech suggests that concerns about the way forecasts are communicated have been taken on board.
In a recent report, BNZ head of research Stephen Toplis suggested that the RBNZ may need to suspend long-term forecasting, as it did during the peak of Covid uncertainty.
US President Donald Trump’s tariff policies had “thrown the global central banking community into disarray”, Toplis said.
He noted that the European Central Bank and the Bank of Canada have respectively declined to give forward guidance or forecasts in their latest policy announcements.
Toplis suggested we may see the RBNZ do something similar and put more focus on scenario analysis.
There is no question that in the short term, the RBNZ faces a complex challenge to balance the competing risks of inflation and disinflation and keep the economic recovery alive.
More dramatic structural change may yet be coming for the RBNZ, depending on who is eventually appointed as permanent governor.
For now, though, the incumbent team will need to be at the top of their game.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003.
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