Finance Minister Nicola Willis fronting the media at Parliament following the resignation of RBNZ Governor Adrian Orr. Video / Mark Mitchell
Analysis by Thomas Coughlan
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
The epidemic of public sector seppuku claimed its highest-profile victim on Wednesday with the resignation of Reserve Bank Governor Adrian Orr.
This resignation is quite unlike the others.
While New Zealand’s public service is impartial (and independent to a degree dependent on which department you are talkingabout), few if any offices are as independent as that of Reserve Bank Governor.
Orr’s resignation raised eyebrows almost as high as the bank raised inflation. It is exceedingly rare for a Governor to resign just two years into their five-year term (albeit Orr’s second in this case). It’s also unusual for Orr to resign the day before a glittering monetary policy conference in Wellington celebrating 35 years of inflation targeting. Celebrated ex-US Federal Reserve chairman Ben Bernanke, who led the organisation during the Global Financial Crisis, is set to attend. As of a release published on February 26 – just a week ago – Orr was meant to open the conference. Something has clearly happened, and happened recently.
Orr is no longer attending, the Herald understands. Those who are will have plenty to talk about.
There has been tension between the new Government and the bank going right back to National and Act’s days in opposition. While Willis observed the conventions of respecting the Church and state separation between the Beehive and the bank on Wednesday, under questioning she tellingly referred back to comments she made as the opposition finance spokeswoman, unmuzzled by ministerial warrant.
Those comments included this summation of the bank’s response to Covid: “The Reserve Bank printed tens of billions of dollars, had a lending programme that made money virtually free for the commercial banks.
“When New Zealanders are suffering from a cost-of-living crisis, they expect some accountability. We think the Government should answer questions about whether the Reserve Bank got its decision-making right,” she said during Orr’s reappointment.
More recently, there has been obvious tension between the Beehive and the bank over its funding arrangement. In order to preserve the bank’s independence, funding is agreed every five years, rather than forcing it to go through an annual budget process like other ministries.
The bank’s funding nearly tripled under Labour, rising from about $52 million a year to $149m.
The bank, it would appear, had asked for a funding increase, partly to account for cost pressure increases.
The Beehive, it would appear, was unsympathetic – with Wellington’s diminishing population of Tories joking that the best way for the bank to manage cost pressure increases would be to, you know, not have allowed inflation to rise to 7.3%.
Finance Minister Nicola Willis, speaking exclusively to the Herald last week, even floated the idea of a funding cut for the bank along the lines of the public service baseline savings exercise announced last year.
She was obliquely critical of the bank in some of her remarks for the Herald, saying while she wanted it to be funded adequately, she did not believe it should be given funding for “pet projects”.
Willis said the increase in the bank’s funding had gone “beyond what [she was] comfortable with”.
She said advice from Treasury “suggests that there is room to trim the Reserve Bank’s expenditure without sacrificing their core functions”.
“There is room for savings and it would be appropriate for the Reserve Bank to deliver them,” she said.
No one is saying why Orr resigned, but the strongest indicator that this funding fight was at least partly the cause is that Willis found out about “a possible resignation” not from anyone at the bank, but from Iain Rennie, the head of Treasury – Willis’ adviser in those funding talks. The suspicion was all but confirmed when the bank’s board chairman Neil Quigley confirmed to a press conference that “funding issues” and “policy issues” were among the things the bank was working through with the Government.
Finance Minister Nicola Willis after Orr's resignation. Photo / Mark Mitchell
The other cause of tension is the ongoing scrap over the bank’s decision to force commercial banks to hold more capital.
The bank’s justification for these rules is that it will make the banks more stable (and less likely to require bailing out by the Government). But the commercial banks grumble that it makes them less competitive (and, one might add, less profitable).
The banks have the ear of the Commerce Commission and the Beehive, which is keen to do anything it can to make the banking sector more competitive, including wandering into Orr’s patch and overruling him on the capital rules – which might involve legislating over the top of the Reserve Bank.
When asked last year whether she’d effectively take the side of the Commerce Commission on the capital rules over the bank, Willis said: “Well, we’re accountable to the people who elect us. The RBNZ is unelected. Ultimately, this is about a democratic mandate”.
The bank bridles at this with a mixture of snobbery and reason: it has years and years of expertise in prudential regulation (it does) - how dare a tiny agency of petrol stations and grocery stores give advice on the unimaginable complexity of the banking system?
The capital rules put a target on Orr’s back that has lasted for most of his tenure. The proposal, first announced at the end of 2019, were the subject of one of the most concerted and at times vicious lobbying campaigns ever seen in Wellington.
Orr didn’t help things by taking criticism of the proposal personally, getting into an embarrassing email scrap with NZ Initiative chairman Roger Partridge, accusing him of “character assassination” over a column Partridge had written about the rules. Orr later bailed up NZ Initiative executive director Oliver Hartwich at an airport Koru lounge about the same issue.
The political right in Wellington, angry over the capital proposals which they believed restrained the animal spirits of capitalism, were also frustrated about the bank’s embrace of te ao Māori concepts: hawks and doves were out, kāhu (harrier hawk), kererū (dove) and kōtuku (white heron) were in.
If anything, Orr’s resignation is a reminder that for all the bank’s independence, when push comes to shove, it’s the Finance Minister and the Treasury that come out on top.
It’s a truth etched into the very geography of Wellington: the Treasury is No 1 on the Terrace. The Reserve Bank is No 2.
