Of all the appointments made by a government few are more important than the Governor of the Reserve Bank. In Adrian Orr the bank's board made a reassuring choice and the new Government is clearly glad to confirm it. As chief executive of the NZ Superannuation Fund set up by Labour, Orr has presided over its highly successful investment record while receiving no contributions from the National Government.

Previously Deputy Governor of the bank, he was its head of financial stability, the bank's primary role in the economy. Having worked as a professional economist in the Treasury and in the private sector with the National Bank and the NZ Institute of Economic Research, he knows the finance industry well, he is a good public communicator and he appears to possess the agility that may be needed to accommodate the new Government's planned changes to monetary policy.

Labour wants to give the Governor a dual task — to maintain both low inflation and high employment — rather than simply the near-zero inflation targets governors have been given since 1989 when the bank was entrusted with independent responsibility for financial stability.

The details of the dual mandate will be in the policy targets agreement yet to be finalised between Orr and Finance Minister Grant Robertson. But Robertson has stated in writing, by letter in the Herald on the day before the election, that unlike inflation employment will not have a numerical target.


While low inflation may continue to be expressed as a target such as 0-2 or 1-3 per cent annual increase in the consumer price index, employment will not be stated with the same precision. It is hard to see how it could be.

"Full employment" usually means less than 4 per cent of the workforce is registered unemployed. A strong economy is not static, there is always some unemployment as people lose jobs and look for another. Monetary policy can aim to maintain sufficient economic activity to employ all, or nearly all, the available labour and capital in the country.

That indeed is what monetary policy has always aimed to do. Low inflation, monetarists believe, is essential to maximising employment of labour an all resources in the economy. This belief was born of experience in the 1970s when countries suffered high inflation and high unemployment at the same time. Previously economists believed a degree of inflation had to be tolerated for the sake of full employment. Opponents of monetarism still believe this.

It is not yet clear whether the new Government shares that belief. The policy targets agreement with Orr will answer the question. If they agree on a near-zero inflation target, the economy should remain sound.

The greater problem for monetary policy today is to find ways to stabilise asset prices, especially houses, and restore reasonable interest rates on savings without losing economic growth. Orr appeals as a thinker who will relish that challenge.