26 Nov 2020

The history of NZ's Reserve Bank Governors

From Afternoons with Jesse Mulligan, 3:23 pm on 26 November 2020

The Reserve Bank of New Zealand Governor has copped criticism from all ends of the political spectrum and the media recently because of the continued inflation of house prices during a recession – but is that criticism justified? 

Five Pound Note

Five Pound Note Photo: Public Domain

Since the first pandemic-induced lockdown in March, the Reserve Bank (RBNZ) has unleashed a series of tools to keep wholesale inflation stable, keep unemployment as low as possible and pump money into the economy.

Those tools being the conventional Official Cash Rate (currently frozen at 0.25 percent), the lifting of Loan to Value Ratios (how much money you need saved to borrow from a retail bank) and the more unconventional tools of quantitative easing (also known as money printing) through its buying of government bonds off banks and funding for lending programme (cheap loans for banks).

The trade-off for the move has been house prices, which have risen as much 20 percent in some parts of the country compared with 12 months ago.

Some of the main causes of this phenomena have been the relaxed rules around lending, particularly for property investors, a lack of housing supply and suitable government policy, and a fear of missing out for first home buyers.

In the past two weeks the political and public pressure on RBNZ Governor Adrian Orr and Finance Minister Grant Robertson really turned up, leading to the latter writing to the former, asking him to consider how his monetary policy tools might impact house prices.

In response, Orr outlined to Robertson that he already does that.

To understand what it is the RBNZ and Adrian Orr actually do, Karyn Hay spoke to historian Grant Morris about the history of the RBNZ, its governors and its relationship with the government.

As Morris explained, the RBNZ’s history dates back to 1934 when the Reserve Bank Act was established after England told the Australia and New Zealand governments that the two countries needed to stand on their own two feet and have a central bank to control money supply. Thus, the RBNZ was born.

Back then the Bank’s purpose was to stabilise the exchange-rate and foreign reserve control, as well as be the sole issuer of legal tender in New Zealand (before that retail banks such as BNZ printed its own money).

Between the 1930s and 1970s the RBNZ had just four governors and the economy seemed better for its policies, however, that all changed when Robert Muldoon took power in 1975.

In the space of his nine-year tenure, Muldoon went through four RBNZ Governors as he tried to tighten his grip on the economy.

That lead to a serious overhaul of the RBNZ Act in 1989.

“One of the reasons your churning through these governors is because it’s so difficult to work with Robert Muldoon, because he’s PM and because he’s Finance Minister he’s got this rigid control over the economy with all the wage and price controls and regulations that being a Reserve Bank Governor in that climate is really difficult. But the thing is, these men, they’re not particularly controversial or high profile, it’s Muldoon who’s controversial, and they have the problem because they don’t know how to work in that kind of system,” Morris says.

Adrian Orr, Governor of the Reserve Bank of New Zealand

Adrian Orr, Governor of the Reserve Bank of New Zealand Photo: RNZ / Cole Eastham-Farrelly

While technically independent, the Reserve Bank and its governors clearly struggled with the relationship between the Bank and the government of the day, Morris says.

“When we get the Reserve Bank Act 1989, this clearer idea of independence, and we’ve seen that play out this week with Grant Robertson, the Finance Minister, and Adrian Orr, the Reserve Bank Governor – to what extent can the government tell the Reserve Bank Governor what to do – and there’s a lot of independence there. One of the reasons that independence was clarified in 1989 was because of what Muldoon was doing in the sense of telling them what to do.”

Following the changes in 1989, the Reserve Bank again went through a period of relative stability at the top with Don Brash at the helm.

And as Morris points out, even Brash was less controversial during his 14 years in charge at the RBNZ than the current governor.

 “The role is so bland and opaque that we don’t tend to focus on them in our history,” he says.

However, changes to the RBNZ’s remit since Labour took office in 2017 has given the Bank more to consider when making monetary policy decisions.

The Bank is now required to keep employment at its highest sustainable level, on top of keeping inflation stable and monitoring the financial markets and institutions. 

And to top it off, the government now wants the RBNZ to consider house prices too when deciding its monetary policy statements.

Morris says has led the Orr to let his tongue slip a little recently – highlighting last week’s comment that house price increases were a ‘first world problem’ in the media.

“Because Adrian Orr has come into the role and, in a way, breached those social conventions of the role, I’m not saying policy conventions, but the social conventions of how flamboyant you can be or what you can say, it’s kind of made him a target. 

“So, I think we can learn from this that maybe one of the reasons the previous Reserve Bank Governors were the dour, bland, low profile figures… was because they didn’t want to be a target, they didn’t want to have the media and the government focussing on them and blaming them for big economic developments. 

“Unfortunately for Adrian Orr, this week and last week, this is exactly what’s happened.”