Last Friday, the Reserve Bank’s Annual Reports were published. There were two of them, both required by law. But most people wouldn’t know that.
There was the outgoing Governor’s own report on the Bank’s performance, the annual accounts etc. That warranted a press release, and some modest media coverage. But buried inside the Bank’s annual report was the, quite separate, statutory Annual Report of the Reserve Bank’s Board. It has no separate place on the Bank’s website, it wasn’t accompanied by a press release from the chairman, although this year it did actually get passing mention in the “acting Governor”‘s press release.
The Reserve Bank Board isn’t a real board, in the sense known either in the private business sector, or in the government sector. As the Board itself notes “the Board is a unique governance body in the public sector”. The Board largely controls the appointment of the Governor, and has some say over the recommended dividend. But otherwise, its powers are all supposed to be about providing a level of scrutiny and monitoring of the Bank – and in particular the Governor personally – on behalf of the Minister of Finance and the public. In practice, at least with a public face on, the Board tends to be emollience personified – nothing to worry about here chaps – that has very effectively served the interests of successive Governors.
A post about the Board’s Annual Report has become a bit of an annual ritual (2015 and 2016). But before turning to the substance of the Board’s 2017 report, I wanted to pick up just a few points in the (now former) Governor’s report.
In his final speech as Governor (which I wrote about here), Graeme Wheeler sought to (a) tell a pretty positive story about New Zealand’s economic performance over his five years in office, and (b) claim significant credit for the Bank for that (supposed) good performance. He returns to the theme in the Annual Report
With our own economy about to enter its ninth year of expansion, it’s useful to put a longer-term focus on New Zealand’s progress. Compared to the period 1990-2012
(i.e., the 22-year period since flexible inflation targeting was first introduced), New Zealand’s economy has experienced slightly stronger GDP growth and much faster employment growth over the last five years. Headline inflation has, however, been weaker and our current account deficit has been smaller as a share of GDP, while the unemployment rate has been around its average for the period since the mid-1990s. Labour productivity growth has been disappointing, a challenge we share with many other advanced economies. While some of these economic outcomes since 2012 lie beyond the influence of Reserve Bank policy levers, the Bank’s monetary policy has been a significant driver behind the growth in output and employment.
Setting aside the minor point that there was a double-dip recession in 2010, and thus any expansion has been running for only around seven years, there is so much wrong or misleading with these claims that it is hard to believe that a serious public figure – a public servant not a politician – would repeat them.
Where to begin?
Perhaps with the five years in which there has been no labour productivity growth at all. Yes, global productivity growth is weaker than it was in the 1990s and early 2000s, but few other advanced economies have experienced anything as bad as New Zealand’s productivity record in the last five years.
Or with the fact that headline GDP growth has been reasonable only because of very rapid population growth. Growth in real per capita GDP has been pretty poor, largely reflecting the complete absence of productivity growth. Similarly, rapid employment growth mostly reflects rapid population growth, and unemployment has been above any reasonable estimates of a NAIRU throughout the Governor’s term.
Or with the shrinkage of the export sector as a share of GDP.
Or with house prices.
Or with the fact that, over this particular five years I’m pretty sure that the Reserve Bank was the only advanced country central bank to boldly set off on what it envisaged as a large tightening phase, only to have to (grudgingly) more than complete unwind the tightenings they actually did implement.
With no global crises, no domestic crises, no domestic concerns about conventional monetary policy exhausting its capacity (unlike many other advanced countries), Wheeler should have had a fairly easy five years. As it is, there isn’t much credit he can claim for the Bank and its monetary policy.
It is the sort of self-serving nonsense the Bank’s Board – if it was doing its job – should have been calling out. Apart from being simply wrong, it isn’t even helpful. If the Bank had really had the huge influence on medium-term economic performance that the Governor seems to be claiming, it rather undermines the case for having so much power – so many choices- at such a remove from elected politicians. The normal case for an independent central bank is that such an agency will keep inflation down and won’t make much difference to economic performance at all.
But there is – again – little sign in the Board’s Report of serious scrutiny or accountability. Even honesty seems to be at a premium.
The Board’s Reports have certainly lengthened. Only three years ago, the Board’s report was only two pages long. Last year’s report was four pages long. This year’s report is six pages long, and the first four of them are quite densely-packed text.
But apparently the Reserve Bank does no wrong, ever. So not only is the Reserve Bank Board “a unique governance body” in the public sector, but the Reserve Bank must be a unique organisation, public or private. One wonders if it was immaculately conceived, or acquired such perfection itself?
There is two solid pages of text on monetary policy and (as far as I can see) not a word that management would feel even slightly uncomfortable with. No areas that the Board thinks the Bank might have put greater emphasis on, no disagreement, nothing.
There is another one and a half pages on the Bank’s regulatory functions, but again apparently nothing where the Board thought the Bank might have done better, or areas where a different emphasis might have been helpful. It could all have been written by management (and may well have been). Management will have been particularly pleased to read this
“The Board has also observed that the Bank carefully considers the feedback it receives on regulatory initiatives, bearing in mind that regulated institutions will not always agree with the regulator’s approach and the eventual regulatory outcomes.”
No doubt, although there is little evidence open to the rest of us to suggest that the Bank pays any heed to substantive feedback in its formal consultation processes. And one might reasonably wonder whether in a moment of introspection the Board might perhaps think that “monitored institutions will not always agree with the monitor’s approach or the eventual conclusions of the monitor”, and wonder if that description has ever characterised the Board’s Annual Reports on the bank.
And so we labour on through lots of descriptive text about the activities of the Board – with nothing on the evaluative frameworks they use, or the external advice they draw on. As we do, we come to the odd interesting snippet such as this
“Monitoring the Bank’s relationships is a continuous process. During the year the Board availed itself of a number of opportunities to observe how these were operating in practice, paying particular regard to any feedback on the messaging, transparency and accountability of the Bank.”
It looks as though this sentence is supposed to be meaningful, but quite what the meaning is supposed to be isn’t clear at all. Does it mean that perhaps they were just ever so slightly uncomfortable with the heavyhanded pressure Graeme Wheeler and his senior managers brought to bear on Stephen Toplis and the BNZ (the latter an institution the Bank regulates) when Toplis criticised the Governor’s communications, even if they can’t bring themselves to say so? One might hope so, but if people who are paid to hold a powerful agency to account won’t even criticise, even diplomatically, such egregious abuse of office, we might wonder again what use they are to citizens. (And I did lodge an OIA request, the results of which suggests no serious concerns in private either.)
Towards the end of the Board’s report, they write about the change of Governor. To read this report, one wouldn’t know that the Board had been well down the track towards recruiting a new permanent Governor, oblivious to the election, when the Minister of Finance forced them to stop. You have to wonder what they gain by the omission, when the relevant material is already public. They explicitly note that they and Treasury sought advice from Crown Law on the approach to be followed. Despite that advice, the purported “acting Governor” appointment still appears to be unlawful. Remarkably, the report contains nothing on the steps the Board had already taken, before the end of 2016/17 to find a new Governor, even though that appointment is one of their principal responsibilities.
Finally, as it does every year, the Board’s Report notes the Board’s relationship to the Reserve Bank’s superannuation scheme (the Board appoints half the trustees including the chair). This is a deeply troubled fund, grappling with some pretty serious historical errors – including some made by the Board itself, which must approve rule changes. I’ve written previously about the role of the Bank’s (now) deputy chief executive – who attends all Board meetings – in these matters. But the Board’s Annual Report simply records the heart-warming fact that the new superannuation fund chair “kept the Board informed of the work associated with the development of a new Deed for the Trust”. On the principle that when you things you know about are wrong, it leaves one worried about the other material that one doesn’t know in detail. On this occasion, there was no “new deed”, but some amendments to the rules (largely) to allow the superannuation fund to comply with the new Financial Markets Conduct Act. As part of those changes, trustees were about to left in the lurch by the Bank – unremunerated and yet with no liability insurance. Only threats that the new rules would not be executed (requires all trustees to sign) and a written protest to the Board helped secure a backdown. And the more serious issues, of past rules breaches, and mistakes in past rule changes, still look set to head to the courts next year. Millions of dollars are potentially in dispute.
As I’ve written (repeatedly) before, the Reserve Bank’s Board doesn’t really serve much of a useful function. A thoroughgoing reform of the goverance of the Reserve Bank (including the role of the Board) is well overdue, and there are signs now that whoever forms the next government it may well happen (although I am less optimstic of that if National leads the next government as even if they favour some change, they may not favour changes New Zealand First – or the Greens if you must – would support). If the Board is to retain a role as an accountability and monitoring body, it too will need a shake-up. Independent resourcing would help, but much of what is really needed is a different mindset, in which the Board finally serves the public, not acting as guardians of the Governor. My own preference would be for the monitoring and accoutability functions to be undertaken by a Macroeconomic Advisory Council, established formally at arms-length from the Bank, the Treasury and the Minister of Finance.
5 thoughts on “Reserve Bank Annual Reports”
Graeme really was the incarnation of the Grand old Duke of York. He marched the OCR up to the top of the hill and he marched it down again…”
And he’s done his darnedest to re-write history in a most self-serving manner. Well, some of us did suggest hiking in 2014 was a bad idea, and for the right reasons.
Fortunately, I think towards the end people saw him for what he was. Lightweight.
It is hard to fault a RB governor that has presided over a growing economy that has been averaging around 3% a year since his tenure. Inflation has been mainly within the 1% to 3% band and in some years lower than 1% but no one really complains too much of cheaper and cheaper consumption products. Banks have been kept very conservative and as a result are very stable but still very profitable. The 2 mandates of inflation and bank stability have been maintained without causing strife in the economy. House prices are now under control and falling a little with a soft landing the likely outcome.
Overall he has done an excellent job barring that 2014 tightening. But to a large extent that tightening was pressured by the Australian monopoly banks that lobby hard to earn their record profits from manuevering the lag times of interest rate falls on their large installed base of customers.
I would not consider his actions lightweight as his use of macroprudential tools have been pretty rushed and heavy handed with very little consultation. More a heavyweight in terms of the speed of the use of macroprudential tools.
Also he managed to force a form of Capital Gains tax, the Bright Line Test on a very reluctant National government which is usually political taboo.
Well I guess we disagree on that. The economy has the illusion of growth, masked by this government’s think big population policies while productivity has flatlined since 2012.
Monetary policy has been persistently too tight leading to a persistent undershoot of the Reserve Banks mandate while keeping the exchange rate artificially high, squeezing the tradable sector, and leaving unemployment persistently above the NAIRU.
I call that lightweight.
I’d also add, I don’t take anyone’s comments seriously if they’re not prepared to say who they are.
The population agenda by this government has been less than think big. This government is clearly focused on responding to business needs. The primary drivers have been international students and in tourism which is a $15 billion industry. The alternative would be a long recession if we kept to dairy and milk which have declined by 50% in prices instead of 3% per annum we would have an economy of Venezuela based on primary products. Low productivity is due to the fact that both of these are massive service based businesses. If you are not aware, service based businesses rely on more people and not less people. The best service is one with more people not less.
It is not an illusion that inflation is tracking very low with consumer prices falling from retail store discounting and the economy continues to grow at 3% and nearing full employment for anyone that actually wants to work. When you have a social welfare system of free wages then you have to expect a higher percentage of unemployment above NAIRU. Wage inflation is low but with consumer products getting cheaper, people do feel that they can afford to buy more with less pay.
Monetary policy has been tight in the global context with Central banks around the world in QE mode and dropping interest rates but it is completely incorrect to say that the RB has persistently undershoot the inflation target when most times inflation has been kept with the target band which is 1% to 3%. Yes mostly close to the 1% lower band and for a short period just under 1% before rebounding but still very much within the RB mandate of 1% to 3%.