An offshore bank asked a while ago if I’d do a conference call for some of their financial markets clients with an interest in New Zealand, about what the appointment of Adrian Orr as Governor might mean for the Reserve Bank and monetary policy. I did a 20 minute spiel for them yesterday afternoon, and while I won’t bore readers with all that material this post will reflect the gist of what I told them. It builds on the post I wrote at the time Orr’s appointment was announced in December.
Adrian Orr takes office as Governor on 27 March. But what is striking is just how little of the uncertainty that has pervaded monetary policy, ever since it was confirmed last February that Graeme Wheeler was going, has been resolved. The Bank has at times run lines about the certainty the regime provides, but not at present – and perhaps not for some time, even in the best of worlds. What do I have in mind?
- a Policy Targets Agreement has to be signed between the Minister and Orr before the latter can be formally appointed. Whatever process of deliberation is going on – around the key instrument of macro-stabilisation policy – is occurring in secret.
- this secrecy matters more than it usually might, given the government’s commitment to changing the statutory objective for monetary policy and the expectation that they will want to fit as much of that shift into the PTA itself as possible (as I’ve illustrated previously, that wouldn’t be too hard, but precise wording can still matter).
- not only will we have new words, but a new (single) decisionmaker – one who has had no involvement in macro policy for 11 years now. We don’t know his “reaction function” or how we will interpret the (as yet unknown) rules. Quite possibly, neither does he. Typically, when the PTA changes there is quite a bit of jockeying even inside the Bank to bend the ear of the new Governor to one interpretation or the other.
- if the PTA were the only issue, things might settle down quite quickly. But it isn’t.
- instead, we have the two stage review of the Reserve Bank Act, none of which will be finalised (some not even started) before the new Governor takes office. They will be a large number of issues in play including:
- details of the new statutory objective, and any associated reporting requirements,
- the design of the proposed new statutory monetary policy committee including
- the balance of internals and externals,
- who appoints the members,
- the names of these future monetary policy decisionmakers,
- accountability arrangements for the members (including the future of the Bank’s Board).
- issues around transparency including
- the character of any published minutes,
- the freedom of MPC members to articulate their own views in public
- who future PTAs will be between, what form they will take, and whether there will need to be yet another PTA when the new committee is set up (perhaps 9 to 12 months away), and
- even if there isn’t another PTA next year, whether a new MPC (in particular the external members) will interpret the PTA the same way Governor Orr may do while he is the single decisionmaker.
And all that is just about the monetary policy side of the Bank.
Stage 2 of the review of the Reserve Bank Act – which Orr will no doubt be weighing in on what it should even cover – is likely to look at the prudential powers of the Bank, where there is lots of potential for change (or for battles to prevent change?). For example
- should the supervisory and regulatory functions be moved into a separate agency altogether,
- even if not, should the Governor continue to retain single decisionmaker powers, and
- either way, should the Bank have quite such extensive policymaking power (as distinct from the implementation and administration of those policies) as it does, especially over banks.
And there are lot of other issues that could usefully be looked at (eg, the legislative arrangements for funding the Reserve Bank, which are relatively unconstraining and not very transparent at all, or whether the Bank should have policy control over the currency issue, or whether there should be any limits on the extent of the Bank’s financial risk-taking). Quite possibly, the Act – now 30 years old, and having grown like topsy – should be rewritten from scratch.
That is a very long list of battles to fight. The current Reserve Bank senior management appears to have been fighting pretty hard for minimal change: someone last week characterised them to me as favouring any change so long as it leaves things pretty much as they are now. We don’t know what Adrian Orr’s perspectives will be on any of these specific issues (he has said nothing at all since his appointment was announced), which only adds to the uncertainty. But it is no secret that over the course of his career, he has vigorously fought for his patch, and has never – to my knowledge – been keen on giving up power, resources, or flexibility. Many of the possible reforms would tend to do exactly that – part of the reason why the current Reserve Bank management have also resisted them. With Treasury known to favour change, and parties that make up the government favouring change (or at least the appearance of change), there is a lot to fight for.
On things the government is absolutely adamant about there is probably no point fighting – why spend political capital for no expected gain. But on most of these issues, it isn’t clear that the Minister of Finance has any very strong views, or even cares much. My suspicion has long been that he has been mostly interested in something that looks and sounds a bit different – enabling the party base (his, and that of his partners) to see and hear something that sounds not like a Roger Douglas creation.
How will the Bank (and the Governor) win as many of these issues as possible? No doubt, good quality analysis will help a bit – and the Bank probably has more resources at its disposal than The Treasury or private commentators. But part of it is about confidence-building, and that will include how the Governor is seen and heard to handle policy in the coming months.
There has been quite a lot of interest in the (rather sterile) question of whether Adrian will be a “hawk” or a “dove” – more or less inclined to tighten (or loosen) monetary policy. Mostly it is sterile because for most people it depends on the data (I’ve been what most would call “dovish” for the last four years or so, but was at the “hawkish” end of the spectrum on the Bank’s OCR Advisory Group for much of the 2005 to 2008 period: I don’t think I’ve changed.)
We don’t have anything much to go as to how Adrian will be reading the data at present, or what (if any) distinctive analytical model he might bring to bear. It isn’t stuff he has needed to think about – much more than any other public sector CEO might have – for 11 years now. That is a large chunk of anyone’s career.
I sat on the same OCRAG as him for perhaps five years, in two separate stints. It was a long time ago now, but I don’t recall any particular “hawkish” stances or moments. But he didn’t typically mark out the other extreme either (although when he left the Bank in 2000 there was some – probably badly misplaced – market speculation that he couldn’t abide the hawkish stance of his colleagues). He was an operator, a communicator, a manager, rather than someone with a strong view on the data. It is hard to see why that would have changed now, having moved further away from “doing economics” as his day to day job.
There isn’t much sign in anything he’s said – eg speeches he gave as NZSF head – that his view of the world is much different from a conventional mainstream stance. And he’ll come into a Bank which has been convinced for years (and wrong) that core inflation is not far from beginning to pick up. Again, a conventional view – even at the time of the 2014 policy mistake.
The data might shift on us (and the Bank) and justify a quite different stance in time, but even then it looks a lot as if Orr’s incentive will be to do little to step outside a mainstream market consensus, while putting a great deal of effort into communicating an emphasis on the government’s new employment objective (and the limited – but not zero – amount monetary policy can do). Actual OCR setting needn’t be observably very different for people to recognise a difference of tone. And that difference of tone is part of what will help secure confidence in their new Governor among the Minister and his Cabinet colleagues. You are more likely to entrust more too – take less away from – a Governor who is perceived as “sound”. Perhaps, as I’ve argued in recent posts, the data might even justify an OCR cut later in the year. But what the Governor really won’t want are mis-steps: new Governors (all from outside for decades) have each been prone to them, and with so much else unsettled – in play – the stakes are higher than usual.
This isn’t to suggest Adrian is likely to be operating outside the Act – old or new – or that he’ll jeopardise our record of low and stable inflation. But there is – deliberately – a lot of flexibility in any inflation targeting regime. And Adrian is a shrewd political operator. And there are a lots of political battles to win. It is always a mistake to assume that senior officials don’t have private and institutional interests to pursue, as well as public interest (eg core inflation) ones.
As I noted in my earlier post, the contrast between Adrian Orr and Graeme Wheeler as public communicators is likely to be refreshing (mostly). Wheeler simply wasn’t comfortable in the public spotlight – and had never had any prior exposure to it – and so largely avoided it, and acted excessively defensively when he couldn’t avoid it.
It seems unlikely anyone will be making that criticism of Adrian Orr. He’s had two stints as a commercial bank chief economist, and even in his most recent role – head of the super fund – he has been pretty open with the media. The younger Orr could be shockingly frank, and at times quite vulgar in public – unacceptably so in a central bank Governor. No doubt in the intervening years, he’ll have gone some way to rein in his language, but his press conferences – and off the cuff remarks in speeches – are likely to attract a great deal of interest. An openness and sense of humour go a fair way in winning people over. In a way, the communications side of things – from Bank to public/markets – may be easier in the near-term, while Adrian is the sole legal decisionmaker, and his advisers are internal. It will be more challenging if we adopt – as we should – a Swedish, UK or US system where, when the Governor speaks, he is simply one vote, and no more than primus inter pares.
Incidentally, the advent of someone who isn’t (or hasn’t been) the buttoned-up bureaucrat will – or should – greatly increase the pressure on the Reserve Bank to follow the RBA and make available livestreams, or at very least audio recordings, of Q&A sessions the Governor engages in following speeches (on or off the record).
Adrian is pretty outgoing himself (to the extent of trespassing on personal space). And he has been pretty willing to challenge other people’s ideas (or disagree vigorously) – the story is famously told of Alan Bollard letting Adrian loose, and he then taking on Peter Costello pretty directly, at the time the Australian authorities were bidding to take over bank supervision. His track record also suggests that he has become an effective corporate manager – not an unimportant skill as Reserve Bank Governor – but he doesn’t have a history of fostering open debate and challenge. That was my observation at the Reserve Bank, and things don’t seem to have been that different more recently. There is a distinct impression that he works well with those who don’t challenge him, and not so well with those who do; with those who fit his style and not with those who don’t. Many of the abler people don’t seem to have lasted long. He has successfully built strong teams of loyalists. Perhaps it is a management model that might have a place in some contexts – private fiefdoms. It is hard to see that it is the sort of model of leadership for the public sector.
Even less that it is what is needed for the Reserve Bank, heading into a new era, when many are looking for greater openness and less groupthink, in a environment where extreme uncertainty characterises almost everything (perhaps especially about monetary policy). The Bank’s Board and the Minister – the people who hired him – will need to keep an eye out for these tendencies (although whether the Board – in particular – would care much is another question). Otherwise there is a risk that anyone who challenges him – statutory MPC member or not – could find themselves frozen out.
A former central banker observed to me the other day about one of the highly-regarded RBNZ Governors of the past: “he was a wonderful man, understated and wise, marvellous to work for, wrote beautifully, encouraged a great openness of thinking among the staff…..he wanted good economics practiced”
No one can be good at everything. But in my view, a critical quality in a Governor should be a degree of depth and seriousness, that looks for the truth – or at least our best approximations to it – not the arguments that sound superficially appealing, or which fend off a particular critic for the day. We might hope to learn something – not just the latest hint about the OCR – when we read the speeches of a really good senior central banker. But there has never been much sign that Adrian is a deep thinker – more the capable operative. And I’m uneasy that he has repeatedly proved himself too ready to grab, and run with, someone’s superficially appealing idea, or a politically opportune story.
It was an approach on display at the Bank in the past, but it has also been generally visible much more recently. There was the politically-opportune, but analytically not very persuasive, decision last year to unload carbon exposures from the NZSF, and then bury this major choice in his reset benchmark so that it is very hard to keep track of whether it will prove to have been a good call. Even more starkly, there were his appearances in the media last year to defend the Fund. I dealt with some of this stuff in eg this post. There was plenty of playing politics – even though his role, as a public servant, was to run the Fund not to champion the policy choice to have it. There were rather strained attempts to champion the Fund’s investment returns – even though the Fund’s own official documents stress that one really needs a 20 year horizon to evaluate the value added in such a high risk fund. There were strained attempts to present as a sovereign wealth fund – similar to Norway or Abu Dhabi – what is actually a speculative investment vehicle for a country that still has net debt outstanding. Investment performance was defended with not a Sharpe ratio, or a Crown cost of capital, in sight, and no engagement with the international literature on the limits of active management. And despite weighing into the political debates, no attempts to frame the role of NZSF in the context of overall Crown finances (including the ability to absorb large adverse shocks), let alone those of citizens themselves.
In many of the areas he has touched on, there are perhaps quite reasonable serious perspectives to be brought to the table. But they take a bit longer to develop and articulate. My point here isn’t that there is necessarily anything wrong with the NZSF, or even its management under Adrian for the last decade. But rather that he sometimes seems unable to resist grabbing the superficially appealing soundbite, or playing to a political audience, or loathe (or unable) to engage at a more serious level.
Adrian has grown into new roles in past. When he was first appointed chief economist of the Reserve Bank there was a fair amount of scepticism in some quarters. The economics department was fairly dysfunctional and Adrian had little management experience. In fact, he did a pretty good managerial job – even if, on his own confession, it was a deliberately divisive approach, involving playing off one part the Bank off against another.
Perhaps he’ll do so again, stepping up to this much bigger job, in the spotlight not as a commentator, but as a policymaker. I hope so, but the risks seem quite large, and the uncertainties quite real. Better communications seem assured – even with the constant uncertainty as to whether he can hold his tongue – and I’m sure we’ll see lots of more or less deft political maneouvring. There are, after all, , lots of turf fights looming. But whether he provides much impetus for better analysis, better policy, better thought leadership, or is interested in inaugurating of a new open, engaged, and accountable era for the Reserve Bank is another question. They won’t be the direction – the priority anyway – that Adrian’s natural inclinations seem to run. Winning political and turf fights is more likely to be a priority.
And I really hope that not all the stories I’ve heard – including that one about Adrian on top of a bar in Courtenay Place – are true. Being Governor of the central bank – bearing, for now, an enormous amount of individual power – should bring with it an expectation (matched by reality) of gravitas and decorum. I’m sure he’ll be at hit at the Reserve Bank’s annual financial markets function, but I’m not sure that is quite the relevant standard.