Next week Adrian Orr will have completed the first quarter of his five year term as Governor of the Reserve Bank. In that time, he has given no substantive on-the-record speeches on either of his main areas of policy responsibility: monetary policy, or financial stability/supervision/regulation. That would be highly unusual at any time, but these haven’t been normal settled periods. On the monetary policy front, the statutory goal of monetary policy has been changed for the first time in 30 years, and the governance structure has also changed, all that amid a backdrop in which the Bank has had to once again change its policy stance, from looking towards OCR increases (in Orr’s first MPS, the interest rate track started rising from about now) towards cutting the OCR yet again. And on the financial regulatory front, the Governor has proposed what appears to be the largest and most costly discretionary regulatory intervention (the bank capital proposals) since governors were first given prudential regulatory powers. And the Governor wields all those regulatory powers personally; unlike monetary policy now, decisions aren’t the shared responsibility of a committee. So it might have been reasonable to have expected several serious speeches from the Governor – who is, after all, often lauded for his communications skills.
As one benchmark, the Reserve Bank of Australia’s 2019 speeches page already has 23 entries, including four substantive speeches from the Governor. And the Reserve Bank of New Zealand? Three speeches this year to date, only one from the Governor, and that was not a substantive contribution on either monetary policy or financial stability. For the record, the RBA has a narrower range of responsibilities than the Reserve Bank of New Zealand.
But there was a recent speech – given in Japan – from one of his deputies, Assistant Governor and General Manager of Economics, Financial Markets and Banking, Christian Hawkesby. Hawkesby recently rejoined the Bank after stints at the Bank of England and then in the local funds management sector. He is a direct report to the Governor, and if he doesn’t have the official title of Deputy Governor (for some strange reason – Wellington government agencies typically being awash with multiple people carrying ‘deputy’ titles), he is the most senior person below the Governor on the monetary policy side of the Bank. He is a full voting member of the Monetary Policy Committee, so in additional to his staff appointment he is now a statutory officeholder. His counterparts are people like (Deputy Governors) Guy Debelle at the RBA or Ben Broadbent at the Bank of England. He is an able and amiable guy, and when he speaks we should be able to expect something pretty substantial and authoritative. And in his first public speech, on the monetary policy legislative changes, we can be sure he isn’t saying anything the Governor would be unhappy with.
And so it was disappointing, to say the very least, how much political spin suffused the speech, and how lacking in analytical substance it was. Recall that this wasn’t a speech to (say) a provincial Rotary Club, but to a Bank of Japan conference of economists and central bankers.
The Reserve Bank’s press release for the speech was, however, presumably aimed squarely at New Zealand audiences. It is full of spin as well.
The Reserve Bank has significantly changed the way it makes monetary policy decisions, keeping itself in step with public expectations.
There are two problems with this. The first is that, until rather recently, the Bank was telling us regularly and repeatedly, that the statutory changes (goal and governance) weren’t that significant at all, and really only wrote into legislation the way the Bank has been doing things for a long time (and perhaps built resilience against rare very bad Governors). Hawkesby’s predecessor told us (and his audience) that when he ventured offshore for a speech last April (after Orr had taken office).
And the second is that the implication is that the Reserve Bank itself made these changes. It didn’t. Parliament did, at the initiative of an elected government. The difference isn’t trivial, because the entire press release continues in this vein, suggesting that the Reserve Bank is a principal, not an agent mandated by Parliament for very specific purposes. Thus
“We maintain our legitimacy as an institution by serving the public interest and fulfilling our social obligations. Keeping our ‘social licence’ to operate depends on maintaining the public’s trust that we are improving wellbeing,” Mr Hawkesby said.
Nowhere does the Act charge the Bank with identifying what is in the “public interest”, or with “social obligations”. Rather it gives specific responsibilities and powers to the Bank, subject to numerous other laws, and expects the law to be followed. Parliament might make wise choices, daft choices, or some mix of the two, but the Bank’s job is to follow the law (and, perhaps, to offer advice to Ministers on how the law should be worded). Oh, and “wellbeing” does now appear in the Act, but not as goal for the Bank to pursue directly but rather as the expected outcome (together with “prosperity” – never mentioned) of the Bank exercising its specific powers for the specific purposes outlined in statute.
The spin continues
“Thirty years ago New Zealand was prepared to accept a single expert – the Governor – making decisions about how to fight inflation. People now expect to see how and why decisions are made, expect that decision makers reflect wider society, and that current issues and concerns are factored into the decision making. By meeting these expectations, we can improve public trust in the legitimacy of the Reserve Bank’s work,” he said.
This is, frankly, pretty bizarre. For a start, the old Act never required the appointment of an “expert” (and none of those who held office under that legislation really were monetary policy experts). But, more importantly, as the Bank told us for the previous 30 years – and as documents at the time the Act was introduced make clear – the focus of the earlier legislation was squarely on transparency and accountability. (I happen to think the new legislation is an improvement, but not on the “how and why decisions are made” front.)
And then we get the burble about “decision makers reflect wider society”. I’m not sure quite how a committee of seven middle-aged economists – and if these things matter to you, not one Maori – quite meet that criterion, but perhaps one day the Bank will explain.
But what worried me more was the claim that “people” (who, specifically?) “expect…that current issues and concerns are factored into the decision making”. Personally, I hope that all decisionmakers in all statutory bodies exercise their powers under the law, taking into account factors they are supposed to consider, and not bringing extraneous personal agendas to the table, hijacking public office as a platform for personal political causes.
I largely agree with the next paragraph
Mr Hawkesby outlined the new committee process that the Reserve Bank uses for deciding the official cash rate, noting that diversity among decision makers improves the pool of knowledge, insures against extreme views, and reduces groupthink.
(which is why I was championing a committee model, including outsiders, when the Reserve Bank was – until quite recently – opposed). But this is what Hawkesby – and presumably Orr – think we need a monetary policy committee for
“This diversity is needed to confront issues such as climate, technological, and other structural and social changes,” he said.
If you think – as I do – that climate change is, at most, of peripheral relevance to the Bank’s financial stability functions, it is of no real relevance at all to monetary policy at all. One could say much the same of “social changes” (what did he have in mind?) or even “technological changes”. Now, to be sure, there is an old line of argument that the Reserve Bank needs to be aware of anything that might materially alter neutral interest rates or the neutral unemployment rate, but even to the extent that is so, the issues and challenges are no different than they have ever been – in fact, the issues the Bank currently has to be aware of (around monetary policy) are almost certainly much less broad in scope than those it faced 30 years ago, when the Act came into force, in the midst of successive waves of extensive waves of micro reform.
The press release ends with this piece of politics.
He also said that collaboration with government can be undertaken in a way that maintains the Reserve Bank’s political independence while working on the broader objective of improving wellbeing.
It is simply not the Reserve Bank’s job to range more broadly, assisting the government with its partisan agendas, even if the individuals involved happen to be left-wing themselves. To repeat, the Act is very clear that the Bank does not have an all-embracing goal of pursuing “wellbeing”, but is specifically charged with using its monetary policy powers to achieve and maintain price stability and “support” maximum sustainable employment.
The body of the speech – with much more space for qualification – is no better, and is arguably worse. There are ahistorical claims (notably, that the previous Act brought down inflation from “around 20 per cent” – inflation was about 5 per cent when the law was enacted). And the nonsense suggestion that only now do people realise that low inflation is not an “end it itself”.
And never once do you see any reference (even politely) to the fact that the law was amended by Parliament as the outcome of a political process – notably, a Minister of Finance who, in Opposition, needed some product differentiation (both from his National opponents, and from the ideological enemies formerly in his own party – the reformers of the late 80s) but who always seemed more interested in cosmetics than in substance. In fact, one never even sees the point the Minister often made – and which Hawkesby’s audience of central bankers must have been well aware – that the recent legislative changes just bring the New Zealand legislation a bit closer to the (very longstanding) legislation in the US and Australia. Instead we get this vacuity
Our policy framework changed because times are changing. For the Reserve Bank to maintain its credibility and relevance, we must change too.
And there is the incoherence of championing the record of the last 30 years, all while claiming that “a sole decisionmaker or uniform committee cannot possibly hope to possess the broad range of insights necessary to consider these issues” (climate change and social change again). And the seeming blind spot about the utterly crucial nature of what a committee can bring…..and yet at the same time, the bank capital proposals rely wholly on a decision by one individual, the same individual championing the change.
There is questionable stuff throughout the speech, but this one near the end caught my eye,
There is emerging consensus that coordination is necessary for an optimal response of broader macroeconomic policy.16 For central banks, operational independence does not have to mean operational isolation. Rather, collaboration with government can be done in a way that builds and reinforces the social licence to operate, by showing a willingness to work with other partners to do whatever is necessary to achieve the broader objective—improving public wellbeing.
More politics, more wellbeing spin, but it was that footnote that I lighted on, apparently supporting the surprising claims of an “emerging consensus the coordination is necessary” for macro policy. I was intrigued and wondered what I’d missed. When I looked more closely, the reference was to a short recent comment by economic historian Barry Eichengreen and it wasn’t an argument for more coordination at all. Instead, it simply observed that in many countries monetary policy appeared to have more or less reached its limits and thus that fiscal policy might be much more important in future.
But nominal interest rates can’t be forced much below zero. And monetary policymakers, for their part, seem unable to push inflation above 1-2% in order to drive down real interest rates. Investment demand therefore tends to fall short of saving, creating a risk of chronic underemployment.
In this case, the argument for additional deficit spending to supplement deficient private spending is stronger, because there is less risk of crowding out productive private investment. This does not mean that the scope for running deficits is unlimited, because at some point safe government debt could be re-rated as risky, causing interest rates to rise. That said, these arguments lead to a straightforward conclusion: in the future, we will have to rely more on fiscal policy and less on monetary policy to achieve stable and equitable growth.
You might or might not agree with Eichengreen, but you simply cannot read him – as Hawkesby attempted to represent him – as making a case for more coordination of policy. If anything, it is more a case for the growing irrelevance of central banks (a claim one can agree with or not). It was either careless or dishonest to present it otherwise. I prefer to believe careless, but the Bank should be better than that.
And who knows what Hawkesby’s expert audience made of the final couple of paragraphs of the speech
And it is not enough to grudgingly adapt. In order to maintain credibility, central banks must embrace change and prove to the public that they are capable of delivering on their objectives. To remain credible is to remain relevant. Central banks should keep their eyes open, and be ready to change tack. Our destination—a world with improved wellbeing for our citizens—may not change, but the best route for getting there may.
We must adapt. We must continue to improve the wellbeing of our citizens. We must remain credible.
Rhetorical burble that was really a substance-free zone.
Speeches by good (economics) deputy governors of advanced country central banks – eg Debelle and Broadbent, and their Canadian counterparts, or some of the economist heads of regional US Federal Reserves – are often well-worth reading. They typically contain and reflect serious economic analysis, and help create confidence in the robustness and depth of the institution itself. Sadly, this first speech by Hawkesby fells well short of that standard – and the gap is the more noticeable given the stature of the audience he was speaking to. Credibility does matter, but if they are to be taken seriously the MPC (Orr, Hawkesby and the rest) will need to be making rather more serious and substantive – occasional – speeches than what was on offer this time round.
One can mount an argument that in the last year or two the Reserve Bank of New Zealand’s actual monetary policy calls have been a bit better than those of the Reserve Bank of Australia, but without a sense of a robust underpinning – serious sustained analysis, and articulation of that reasoning, and of how they understand the economy – we can’t have any confidence in the robustness of the institution, or that better calls have been any more than dumb luck.