It’s worth reminding ourselves why advanced economies use independent central banks to conduct their monetary policy, given the controversial role the Reserve Bank of New Zealand has played in our political and economic lives during the past five years – and the mess around the departure of governor Adrian Orr in March and more recently board chair Neil Quigley.
These banks have the power to inflate away the value of our incomes and life savings, then bring inflation down again by plunging the economy into a deep recession, costing people their jobs, businesses, homes. And they do all this outside any mechanisms of democratic control. The government cannot direct the bank, although we recently learnt the prime minister regularly gives his reckons to the monetary policy committee, who are surely dazzled by his observations that interest rates should be low and credit should be cheap.
In New Zealand there’s a single-word explanation for this undemocratic model: Muldoon. He pressured the bank to lower interest rates in election years, making mortgages and loans cheaper, speeding up the economy, pushing up wages. The consequence was high and sustained inflation – it hit 18.4% in 1980. In comparison, the post-Covid price surge never went above 7.3%. Muldoon is the poster child for independent central banking, proving that regulating the money supply is too important to be left to politicians. We empower the technocrats on the condition they remain scrupulously apolitical and publicly accountable for their actions.
National and Act did not feel governor Orr was apolitical. They took umbrage at his promotion of climate change and progressive interpretation of the principles of the Treaty of Waitangi as core business for the bank during a time both were contentious issues.
There are still grave reservations about the RBNZ’s judgment during and after Covid, and Orr did not welcome scrutiny of his enormously consequential decisions, bristling with indignation when challenged by journalists and opposition MPs. After he stood down from his role without any explanation, the bank’s chair declared Orr resigned for “personal reasons”. No one believed this.
After a six-month media battle to drag the truth out of the nation’s most powerful financial institution, it emerged Orr had clashed with Finance Minister Nicola Willis and Treasury officials about the bank’s budget. He’d stepped down a week before his departure was made public.
It also became apparent Reserve Bank chair Neil Quigley had fought a vigorous campaign to prevent any of the background being made public. Willis was aware of all of this but chose not to disclose it, and kept Quigley on as chair until it emerged in the media. Her office claimed Quigley had chosen to hand over to a new chair “having overseen a number of key workstreams for the bank” – a second misleading press release to address the consequences of the first.
Critique catches on
There’s a critique of independent central banking that has circulated on the left for many years and is gaining credibility among the new right as Donald Trump takes on the independence of the US Federal Reserve.
This argues that central banks symbolise everything that’s wrong with modern political economies. Decisions that should be made by elected politicians have been placed beyond democratic accountability. Instead they’re made by economists who are allegedly impartial but have their own ideologies and agendas they advance beyond a veneer of neutrality. They work in concert with other central bankers around the world against the interests of their own citizens, prioritising price stability and currency value over more egalitarian goals like full employment or higher wages for workers. Elections and political debates merely deliver the illusion of democracy.
This critique is probably wrong: we’d be better off with Orr on a bad day than if Chris Hipkins or Christopher Luxon could game the macroeconomy for their own political interests. But this culture of imperious secrecy around the bank is not encouraging. People will believe the bank is malevolent if its leaders behave like villains. And the government’s near total powerlessness in the economic sphere is striking. It is desperate to be seen to be doing things without doing anything.
Let’s go shopping
Shortly before Quigley’s resignation Willis announced her plans for the grocery sector. After five months of investigation she was creating a fast-track regime for building new supermarkets – a policy that could have been announced five months ago (and should have been introduced 10 years ago.) Even if a new entrant enters the market and builds these supermarkets it could take years – decades – for food prices to equilibrate.
A few days after that, Luxon revealed an exciting new plan to build an Amazon data centre in Auckland, investing billions of dollars, creating over 1000 jobs. Labour pointed out it made the same announcement in 2021, and it’s not clear if Amazon is going to build anything or is merely hosting its servers in pre-existing facilities.
That same day, Smiths City – which has operated for more than 100 years – went into voluntary administration.
It would all be comic if it wasn’t so bleak.
But it’s not a cabal of economists that’s keeping the government from acting. Instead, it’s a combination of conservatism, vested interests and the configuration of the coalition government, which requires consensus between all three parties to advance a new policy – and all three have economic philosophies that are often irreconcilable.
This isn’t a problem that can be solved by replacing the prime minister or finance minister, and it will get worse if the parties of the right somehow scratch and claw their way to re-election next year as National’s conspicuous weakness strengthens Act and New Zealand First.
There are worse things than an economy governed by unaccountable central bankers – the logic of MMP is delivering us coalition arrangements that barely govern at all.
