Peter Nicholl was the Reserve Bank’s chief economist back when I joined the Bank and later oversaw (from the Bank’s side) the entire overhaul of the Reserve Bank Act in the late 1980s that culminated in the model that governed the Bank for decades (and more recent changes are mostly in the nature of refinements). Peter served as Deputy Governor, on the policy side of the Bank, for a number of years in the 1990s before heading off to be Executive Director (for NZ and a bunch of other countries) at the World Bank. He then became Governor of new central bank of Bosnia. Peter seemed to be in his element there (I’ve heard a few of his stories at times over the years), and after serving as respected Governor there for seven years was a part-time consultant to that central bank for a number of years. He has also been adviser to a number of other central banks. These days, retired in the Waikato, he writes a regular column for a couple of the local papers, and tells me quite a few of them in recent years have touched on Reserve Bank issues.

This is his column for today’s Cambridge News, focusing on the very-evident governance failures for which the entire board is responsible. As he notes, it isn’t written for a geeky economists or Wellington policy nerds but for ordinary heartland readers. It is also focused on the Reserve Bank players rather than the interactions involving the government. He has given me permission to share it.

RBNZ has gone Third World.

I have written two columns previously on stories about what is happening in NZ that I would expect to see in a third world country but not in NZ.  As someone who worked in the RBNZ for twenty-two years and was proud of the institution, I never expected to be able to add the RBNZ to my list of NZ third-world stories. In fact, describing what has happened to the governance of the RBNZ over the last few years as third-world is unfair to most third-world countries.

The governance saga came to a dramatic point  in March when the Governor, Adrian Orr, suddenly resigned. It hit the headlines again recently when the Chairman of the RBNZ Board, Neil Quigley, also resigned suddenly. But the problems had started building up some years earlier. During the period that Adrian Orr was Governor the staff of the RBNZ rose from 250 to 650. In the early stages, the growth of the public sector was being actively encouraged by the then-Government. But with the change of Government in 2023, the public sector began to be down-sized. Somehow the RBNZ didn’t hear that message-or  didn’t think it applied to them. They continued to increase their staff numbers. This is the organization which had been raising interest rates in order to constrain oher people’s expenditure and bring inflation back within its target range. They certainly weren’t saying to people ‘do as we do’. They were saying ‘do as we say’. The spending spree has been largely blamed on Adrian Orr and his empire-building. But the governance question that needs to be asked is where were the Board? Did they agree or were they steam-rolled?

The RBNZ isn’t part of the annual budget cycle. It negotiates a funding agreement with the government every five years. The latest five-yearly negotiations took place early this year. Like Oliver Twist, the RBNZ asked for more – about $ 200 million more. But unlike Oliver Twist, the RBNZ had not been hungry. It was in fact over-weight. The Treasury objected to the request for more and Orr lost his cool and resigned. The Chairman said then that Orr’s sudden departure had nothing to do with the funding negotiations.

It has now become clear that Orr’s departure was caused by the arguments over RBNZ funding and the first arguments were within the RBNZ. Orr and the Board had different views. Despite this, the proposal the RBNZ first put to the government was Orr’s view – a request for $ 200 million more and a further 100 staff. When that was rejected and Orr resigned, I was surprised by how quickly the RBNZ Board was able to come up with a lower request. But it has since been revealed that that was the number the Board thought was appropriate in the first place. The fact that they initially went along with the request for more reflects very poorly on the Board.

The next few months will reveal who will be the next Governor and the next Board Chairman of the RBNZ. They will come into an organization with its reputation in tatters. It is another example of the old adage that good reputations take a long time to gain but can be lost very quickly.