In late August I wrote a piece looking forward to the Annual Report of the Reserve Bank of New Zealand’s Board.   On 27 September, that report was published quietly –  buried inside the Reserve Bank’s own Annual Report, and with no mention of it in the Governor’s press release.    As far as I can see, the Board’s Annual Report got no media coverage at all.

That is both understandable and disappointing.  Understandable, because it is much harder to report what isn’t there.  And disappointing  because Parliament set up the Reserve Bank Board as the principal body charged with holding to account the Governor of the Reserve Bank –  who is probably the single most powerful unelected individual in New Zealand.   The Board, with unparalleled access to inside information, was intended to be the agent for the Minister of Finance and for the general public in holding the Governor, and the Bank, to account.

When the Reserve Bank Act was introduced, the vision of accountability was a pretty simple one:  if (core) inflation was away from target, the Governor was culpable.  It was pretty quickly realised that things were more complex than that.  In addition, the Reserve Bank (Governor) has been given, and has assumed, a lot more discretionary power in a much wider range of areas.  Properly assessing the performance of the Governor in handling his statutory responsibilities/powers requires some pretty substantial analysis.  And substantive accountability isn’t just about a group of the great and good declaring their satisfaction, but about laying out the arguments and evidence, including addressing and responding to the strongest arguments of the critics.

Over 25 years, the Reserve Bank’s Board has pretty consistently failed in that role, even since the requirement for a published Annual Report was introduced in 2003, and the Governor was removed as chair.  From time to time they have asked awkward questions in private  –  no one has ever adequately been able to answer the questions Viv Hall used to pose around quite what clause 4(b) of the PTA really meant  –  and Boards have often had their own individual awkward and dissatisfied members.  But the public face of the Board has been a consistently bland and affirming one.  From the public’s perspective –  and I suspect from that of members of Parliament –  the Board adds next to no value.

That isn’t primarily a commentary on the individuals involved.  I’ve had good relations with many of the able members over the years.  The problem isn’t really with the individuals but with the institutional arrangements and incentives.

The Reserve Bank Board is set up to look like the Board of a corporate.  Many of the people appointed to the Reserve Bank Board have served on corporate Boards.  On a corporate Board the CEO runs the day-to-day business, but the Board is ultimately responsible for the strategy (and for the CEO).  It can command resources.  A very close relationship between CEO and Board is vital to the successful functioning of the organisation, and  –  at least in public – the Board needs to fully back the CEO, at least until the day they fire him or her.

By contrast, the Reserve Bank’s Board has no involvement in setting strategy, or deciding policy.  It has formal input to a handful of not-overly-important decisions (eg the size of the dividend to recommend), and only two big roles –  the responsibility to recommend the appointment of a person as Governor (and no person can be appointed who has not been recommended by the Board) and the ability to recommend dismissal (although it cannot actually dismiss the Governor,  and contrary to what is stated in this year’s Annual Report the Minister of Finance can act to dismiss without a recommendation of the Board).

The Act is quite clear that the primary role of the Board is ex post review and accountability.  And yet it goes through the routines that look like a normal corporate Board.  There are monthly Board meetings, a Board audit committee, Board papers, the CEO sits as a member of the Board.  A senior staff member serves as Secretary to the Board.  The Board meets on Bank premises, and has no independent budget or staff resources of its own.  But for an accountability board, the asymmetry is profound –  the Governor has 300 staff who all work fulltime on Reserve Bank issues, while Board members –  not typically experts in the field –  devote a few hours a month to the issues.

The Board can ask for papers from management, but it can’t compel the production of such papers.  It typically meets not just with the Governor (a fellow member of the Board), but with Deputy and Assistant Governors present throughout the meetings, and with other staff in attendance as required.  And unlike the situation in most Crown agencies, even though the Minister of Finance appoints the members of the Board[1], he does not get to appoint the chair.  Rather Board members get to select their own chair, increasing the likelihood that the role will be filled by someone who gets on easily with the Governor.

It would be recipe, perhaps, for effective collegial decision-making, if the Board were a decision-making Board.  But the Board doesn’t have that role; it is supposed to be an arms-length review and accountability agency.  And human nature is to avoid asking too many hard questions of those one works closely with, and to defer to expertise.    That happens between the Board and the Governor, and within the Board.   Thus, both of the independent chairs of the Board have been former senior executives of the Reserve Bank, and the current chair actually spent six months as acting Governor, aiming (unsuccessfully) to become Governor himself).   Both are able people, and either might be well-qualified to sit in a decision-making Reserve Bank Board.  But when the role of the Board is to ask hard questions and hold the Bank to account, being a former senior staffer isn’t necessarily the  best qualification for a Board chair.  Yes, former staff can ask awkward questions too, but in general  – even if they have some technical insights other Board members won’t have – they will be too ready to see things through the eyes of the Governor and staff, to “have his back” as it were.  But we  – citizens –  need a robust and independent eye.  Awkward questions, not sympathy.   Too often, the Reserve Bank’s Board seems to see a significant part of its role as being to help the Governor spread  his story and to explain the choices the Governor is making.

Don’t take my word for it:  this year’s Board report states explicitly

With most Board meetings…the Board hosts a larger evening function to engage with representatives of many local businesses and organisations, and to enhance our understanding of local economic developments and issues……. This outreach is a longstanding practice of the Board to ensure visibility of its role among the wider community, and to facilitate directors’ understanding of local economic developments, and the wider public’s understanding of the Bank’s policies.

Worthy activities for management, but that isn’t the role Parliament envisaged for the Board –  whose purpose is to hold management to account, not help management explain their choices to (select elements of) the public.

All that is by way of getting to this year’s Board Annual Report (from p3).  It was better than last year’s in one respect.  This year’s report stretched out to a little over three pages (last year’s was less than two pages).  But most of it is still descriptive (and even that contains an error).  I counted 41 paragraphs in the report.  Of them, at most 10 could be considered having anything other than purely descriptive material (“these are the activities we undertake/documents we receive/meetings we attended”).

In my earlier post, I identified some issues this year’s report might cover, if it were to do well the sort of scrutiny and accountability job Parliament appears to have intended.

This year’s Annual Report might perhaps cover, in some depth, issues such as:

• The way that core inflation has now been well below the middle of the target range for some years

• The significant policy mistake that was made last year in raising the OCR repeatedly and only very belatedly beginning to slowly cut it again.

• The poor quality of Bank’s research, analysis, and argumentation around the housing market, and around the new investor finance restrictions in particular.

• The obstructive and non-transparent approach the Bank has taken, including with respect to compliance with the Official Information Act.

What is about the Governor’s performance, and stewardship of resources, that has led to these outcomes? And what steps are being taken to avoid a repetition?  Many outsiders might have a view, but the Board has unique access to the inner workings of the Bank, and the ability to grill management.

In fact, probably to no one’s surprise, there is no substantive analysis in the report of any of these issues, or any others.  The report has a single sentence stating its comfort with the new LVR restrictions.  In discussing monetary policy, the substantial policy reversal (in which the OCR was raised aggressively last year and then cut this year) was not even mentioned.  The Board appears to have had no concerns about the conduct of monetary policy at any point in the year, and simply offers the anodyne observation that they consider that “the Governor made appropriate monetary policy decisions”, while providing no analysis to defend that conclusion (although  I don’t take from that text that they gave the Governor an enthusiastic A+).  In neither monetary policy nor financial stability is there any sense of the events and policy responses being part of a chain of events stretching back over several years.

I’m not suggesting that the Board should have concluded that the Governor made mistakes.  Reasonable people might differ on that, but we should expect to see signs that the Board has thought hard about the issues, engaged with alternative perspectives, rather than just looked to gloss over any potential areas of awkwardness.  There is no sign of that this year, or in previous years.

In essence what we seem to have is a model in which the Board majority has mostly been interested in being something of a cheer leader for the Governor, helping get the Governor’s message across and not making trouble. But they don’t seem to realise that they work  not for the Governor but for the public –  who need robust scrutiny of powerful public agencies.

The Board’s Annual Report contains a mildly interesting list of some of the papers management provided to the Board during the year (I might OIA a couple of them).  But it must surely be a list than contains a major omission.  Readers may recall that I lodged an OIA request for copies of any work the Bank had been doing on reforming the governance of the Bank.  The Bank refused to release anything, in the process confirming the scale of the work programme they had underway (which appears to have included professional legal advice and discussions with the Minister of Finance).  Given the sensitivities the Board has historically displayed around anything to do with governance –  including Bulletin articles on related issues –  it is simply inconceivable that there were no discussions at the Board, or papers to the Board, on the issue during the 2014/15 year.  The Board might reflect that there would be at least as great a public interest in knowing that the Board has received, and discussed, a paper on that issue as on, say, “differences in methodologies in calculating and assessing the output gap”.

The Reserve Bank’s Board simply does not do its job well. It may be useful in some other roles –  perhaps an occasional sounding board for the Governor –  but the Board that is supposed to be focused on arms-length accountability and review, as agent for the Minister and the public.  And yet it has never once published a critical comment about the Bank (in subject matter which is riddled with uncertainty and where mistakes and revisions to judgements are inevitable)  It does not publish its minutes, its papers, its agenda (even with a lag) and is just as obstructive of OIA requests as Bank management.  It is simply not worth the money we spend on it.

Readers might wonder why I harp on the issue.  After all, the Board doesn’t cost that much.  But recall just how much power the Governor, personally, exercises.  The Board was supposed to provide the check on gubernatorial mistakes or misjudgements –  counterweight to the unusual amount of power vested in a single unelected official.  It has not done so, does not do so, and probably –  as currently constituted –  cannot really be expected to do so.  We need serious structural reform of the Reserve Bank: decision-making by committees appointed by the Minister of Finance, and ex post review and analysis (of all limbs of macro policy) by a body that is better resourced and operates at much greater distance from the Governor and his senior staff.

[1] Although the Governor himself has an input.  On one occasion, a former Governor adamantly insisted to the Minister that a certain former respected market economist not be appointed (he and the Governor had recently disagreed on the OCR).  The Minister gave way (appointing instead someone who had recently been the political adviser in the office of one of his colleagues).

In a comment the other day on my post outlining a possible alternative governance model for the Reserve Bank, Andrew Coleman at the University of Otago included some quotes from Walter Bagehot’s 1873 classic work Lombard Street: A Description of the Money Market (available free here).

The quote that particularly took my fancy was some concluding remarks Bagehot made about the need for changes to the structure and governance of the Bank of England.

“There should be no delicacy as to altering the constitution of the Bank of England. The existing constitution was framed in times that have passed away, and was intended to be used for purposes very different from the present. The founders may have considered that it would lend money to the Government, that it would keep the money of the Government, that it would issue notes payable to bearer, but that it would keep the ‘Banking reserve’ of a great nation no one in the seventeenth century imagined. And when the use to which we are putting an old thing is a new use, in common sense we should think whether the old thing is quite fit for the use to which we are setting it. ‘Putting new wine into old bottles’ is safe only when you watch the condition of the bottle, and adapt its structure most carefully.”

He could have been writing about New Zealand’s situation now.

As I’ve pointed out, our Reserve Bank Act, and particularly the governance features of it, were designed in 1989.  Back then, there weren’t many modern international models to build on.  The provisions of the Act were designed to align with a vision of how core government departments would be run that has now been largely abandoned, they were designed for a conception of what the central bank would be doing that envisaged very little effective discretion, and they were designed before the Crown entities framework was developed for the many other non-departmental government agencies in New Zealand.

Those times have, in Bagehot’s words,  “passed away” and we now need a review and extensive revision of governance, transparency and accountability provisions of the Reserve Bank Act.  Discussion of the issue often focuses on monetary policy, but the governance of the Bank’s extensive powers in banking, non-bank, and insurance regulation is at least as important (and more challenging because the goals are less well-defined).  And as I have been highlighting in the last few weeks, we need to ensure much more openness from the Bank across all its functions, and some more effective structures for holding the Bank and its decision-makers to account.  Bagehot uses a biblical image, but we can go a little further: putting new wine [new expectations of what the Bank should do and how] into old wineskins [the 26 year old Act]  leaves the New Zealand system out of step, and is a recipe for some rather poor and unsatisfactory outcomes.

And with that, I’ll stop for now.  I’ll be back around 13 October,

Yesterday saw comments on Reserve Bank governance from a couple of senior politicians.

The Green Party’s new finance spokesperson, Julie Anne Genter, put out a press release yesterday arguing that

The Reserve Bank made the right decision today to cut the OCR – effectively reversing the mistaken OCR increases in 2014 – but concentrating this power in just one person isn’t the right way to make good decisions,” Green Party finance spokesperson Julie Anne Genter said.

“We’d like to see the Reserve Bank’s decision-making power broadened to more than just one person – decision making by a panel of experts from across the economy would be in line with what happens in other OECD countries.

“Over-forecast inflation has kept interest rates higher than they should have been in recent years, which has cost the economy jobs

I happen to think she is right.  We don’t change the governance model to produce a different OCR decision on any particular day, but as one part of securing a better, more transparent, more resilient central bank.  There are no guarantees, but such a central bank is less likely to make mistakes like last year’s monetary policy –  recall that this is the only central bank in the world that has twice started tightening and then had to reverse itself.  Other countries don’t run things the New Zealand way, and we don’t run other areas of government this way either.  The case for change is pretty clear, and multi-dimensional.

I was interested in one aspect of her statement.  The Greens have previously favoured making the Reserve Bank’s Board the decision-making body for the Bank (which would parallel the approach in Australia), and have at times talked of ensuring that there are representatives of industry, employees etc on the Board.

But in this statement she calls for a “a panel of experts from across the economy”, which appears to suggest something rather more technocratic  (and, hence, perhaps more aligned with a majority of OECD countries, which often have decision-making committees with a majority of at least semi-expert members).  I’m not sure if they intended to convey a change of approach –  perhaps she just want to sound more internationally conventional –  but the change of tone is interesting.

Genter followed up her press release with an oral question in the House yesterday afternoon (number 9), asking the Minister of Finance if he still had confidence in the Reserve Bank following yesterday’s decision, using it as a hook to ask a series of supplementaries about governance (in one of which she repeated the point about a “panel of experts from across the economy”).  The questioning didn’t go overly well for her.  That was partly because the Minister of Finance was away, and Steven Joyce answered for him.  But it was also because she allowed some serious questions about governance to be tied too closely to a specific OCR decision, which allowed Joyce to bat her away with comments along the lines that he didn’t agree there had been a mistake, and we didn’t want politicians second-guessing individual OCR decisions.

Nonetheless, the responses that she received were still interesting.

First, there was a slightly backhanded compliment

Hon STEVEN JOYCE : The suggestion that the member makes, of having a panel of people making the decision, is, I have to say, not the silliest suggestion in monetary policy we have heard from the Greens over the years, and many countries—

and

Julie Anne Genter : Does he agree with Treasury’s advice to him that “The current single decision-maker approach poses risks”, and that “on balance, we think there would be benefits to moving towards a monetary policy committee in the future.”; if not, why not?

Hon STEVEN JOYCE : I am, of course, aware of that policy advice. But it is important to note that the New Zealand system has served us very well, I think, over the last 26-odd years. Yes, you could have a change at some point, but, again, I think that if you wanted to do it, and it is not a proposal that we are at all considering at this point, but if it was something that you wanted to do, you would have to do it for the right reasons and not because you disagreed.

and

Julie Anne Genter : Is the Minister aware that no other OECD country with a central bank gives so much legal power to a single official?

Hon STEVEN JOYCE : As I said previously, I am aware of that. Actually, as I said to the member in one of my earlier answers—this is on behalf of the Minister of Finance—actually, there is a range of ways in which that is done internationally. But the basis on which you would change that is not on the basis that a number of members of Parliament think that the Reserve Bank Governor had made the wrong or unnecessary decision in a previous year, which the member asserted in one of her previous questions.

Julie Anne Genter : Given that the only independent review of New Zealand’s monetary policy framework since the 1989 Act was put in place recommended changing the law in regard to bank governance, and that no other OECD country with a central bank gives so much power to a single individual, will his Government consider updating the law?

Hon STEVEN JOYCE : I thought I had answered that previously, but the answer is no, we have no plans to do so at this stage.

Not once did the Minister defend the basic elements of the current governance structure.  He defended operational independence for the Bank (which Genter didn’t seem to be questioning), he claimed that the system had served us well for 26 years, but there was no principled defence of allowing so much legal power to a single individual.  And he didn’t even rule out change, just noting at the end of the questions that the current government “have no plans to do so at this stage”.

I’ve been a bit puzzled as to why the current government has been resistant to change.  The independent review undertake for the previous government recommended legislative change (and the range of things the Governor is personally deciding has widened materially since then), the Treasury favoured change[1], they found that many market economists favoured change.  And most of the Opposition parties appear to have favoured change –  Labour seems to have come and gone on the issue, but is hardly likely to be a robust supporter of giving so much power to one official.  And, of course, we have good reason to believe – although he is now highly secretive about it –  that Graeme Wheeler favours change.

Among those favouring change, there will be a variety of different motivations and a variety of different alternative models in view.  I sketched out my preferred model here, but I know able people with different perspectives on the details of a new model.

I suspect that the Minister of Finance has little time for the Governor’s preferred model, of legislating to entrench a system in which Reserve Bank senior staff alone get to make the decisions.  Michael Cullen certainly didn’t like that specific option when Lars Svensson recommended it.  And this isn’t just an issue of monetary policy, and there are likely to be quite some differences  –  including with Treasury  – around the Bank’s prudential powers.  But the reluctance to open up the issue is still a bit of a puzzle.  Graeme Wheeler’s poor stewardship of the office of Governor is strengthening the case for change, but these are decisions that really should be made independent of the personalities, and of the foibles of the individuals involved.  That was why the Treasury advice in 2012 was appropriate –  ie flagging the issue with the Minister before it was apparent who would be nominated as the next Governor.

Perhaps the Minister of Finance worries that opening up the issue now would:

• Be seen as political interference in current monetary policy
• Be seen as a vote of no-confidence in the current Governor
• Be seen as a win for Opposition parties, and particularly the Greens.

I hope none of those is the explanation for inaction, but I don’t really understand what is.  It seems most unlikely to be a strong in-principle preference for a model that gives unprecedented amounts of power to a single unelected official (or else presumably Steven Joyce would have run those lines)

Good legislation takes time. Graeme Wheeler will soon start the last two years of his term.  Now is the time for the Minister to open up the issue.  Perhaps he could ask Treasury to prepare a consultative document on the issues and options and put it out for several months of submissions and discussions.  That could allow legislation to be drafted next year, and to be in place so that the new Governor, taking office in late September 2017, would take office knowing that it was on the basis of the new model, while allowing Graeme Wheeler to see out his term on the arrangements that he was appointed on.  There is nothing sacrosanct about those arrangements –  Parliament makes the rules and can change them –  but the timing would now work quite well.  Moreover, since revitalising the Reserve Bank, and making it more rigorous, open, and resilient, will probably require a quite different sort of person, the change of Governor would be a good time for a new law to take effect.

There probably aren’t many votes in Reserve Bank reform, but good governance reforms, bringing our Reserve Bank more into line with international practice and the way other government agencies in New Zealand are run, would be one part of a good legacy for a long-serving Minister of Finance.

[1] I don’t know where Treasury now stands on the issue but have lodged an OIA for copies of any work they have been doing on the issue.

I will have some thoughts on the Monetary Policy Statement itself later, but I wanted to comment briefly on the answer Graeme Wheeler gave to a question at the press conference.

Jenny Ruth from NBR asked him whether he thought the governance model for the Reserve Bank should be changed.  He simply never answered the question.

Instead, he gave a fairly long description of the current system, although only as it applies to quarterly Monetary Policy Statement decisions.  He suggested that people were misunderstanding the current system, but as he described it, it is all very well known.   The process starts with several days of meetings with lots of staff in attendance.  Then a Monetary Policy Committee, apparently now with 12 members including the two external participants, offers advice on the appropriate OCR decision.  The Governor now makes his final decision on the OCR in a meeting of the Governing Committee (himself, his two deputy governors and the assistant governor).  He added that for the last decade there has not been an occasion when the Governor made an OCR decision that went against the advice of the majority of his advisers.    That is no doubt true (I was on the relevant committee for most of the time), although there were several episodes in earlier years when the Governor went against the majority of his advisers (and on at least one of those occasions was right to do so).

But Graeme Wheeler deliberately avoids addressing the issues that those calling for change have made:

• There is no other advanced country central bank or financial regulatory agency that gives so much legal power to a single official.
• There is no other autonomous public agency in New Zealand which gives so much legal power to a single individual.
• The only independent review of New Zealand’s monetary policy framework since the 1989 Act was put in place recommended changing the law (as it happens, to something like the Governor’s de facto model).
• The issues are really about risk –  not about, say, the current stance of monetary (or prudential policy).  We need regimes that cope with mediocre governors, not just good ones.
• All the advisers owe their appointments, and in most cases their pay and promotion prospects to the Governor.  That alters their incentives to disagree with the Governor, at least in respect of Governors –  like the current one –  who do not welcome debate or dissenting opinions).

In 2013 he gave a speech in which he informed the public that he had decided to make decisions in the forum of a Governing Committee –  himself and his three deputy/assistant governors.  He retained the legal powers and responsibilities, but he envisaged working formally in that committee model.   In his speech, he spoke quite favourably of central banks where decisions are the responsibility of executive committees.  And there was no first principles defence of a single decision-maker model.

So it is pretty clear that the Governor favoured legislative change, and along the lines of an internal executive body (which also happen to be much the same lines as Lars Svensson recommended in that review 15 years ago).  He has also made some rather rash comments to staff about his views on the rather different governance ideas of some particular political parties.

Why is he not willing to come out and say that he favours legislative change, even if only to cement the de facto position? It could be argued that such law changes are matters for politicians not central bankers themselves, but the Governor hasn’t been shy of, eg, offering his support for tax changes and other matters rather further from his patch.

As it happens, it isn’t clear that anyone is now strongly defending the current law, which still vests all the legal powers in a hands of a single individual.   But for the Governor to openly favour change would open up debate to a wider range of governance options, and more searching scrutiny of the Governor’s powers outside monetary policy.  And he isn’t keen on debate.

We know that the Reserve Bank has been doing work on the matter. Only recently they refused to release any of it to me, including on the implausible, surely spurious, ground of potential damage to the “substantial economic interests of New Zealand”.  This is, sadly, par for the course when it comes to our highly non-transparent central bank.  It doesn’t publish its economic model, it doesn’t publish submissions on its regulatory changes, it won’t publish work it has been doing on governance reform,  it doesn’t publish minutes of the Governing Committee meetings on policy issues, and it won’t publish the background papers to its Monetary Policy Statements. 

It is past time for change.

The Children’s Commissioner has today released its first annual State of Care report.  The Commissioner is not required to publish such a report, but he is required as follows:

13 Functions in relation to Children, Young Persons, and Their Families Act 1989

• (1) The Commissioner has the following functions in relation to the Children, Young Persons, and Their Families Act 1989:
  • (a) to investigate any decision or recommendation made, or any act done or omitted, under that Act in respect of any child or young person in that child’s or young person’s personal capacity:
  • (b) to monitor and assess—
    • (i) the policies and practices of the department; and
    • (ii) the policies and practices of any other person, body, or organisation that relate to the performance or exercise by the person, body, or organisation of a function, duty, or power under that Act or regulations made under that Act:
  • (c) to encourage the development, within the department, of policies and services that are designed to promote the welfare of children and young persons:
  • (d) on the Commissioner’s own initiative or at the request of the Minister, to advise the Minister on any matter that relates to the administration of that Act or regulations made under that Act:

The State of Care report is to be is “an annual summary from our independent monitoring of Child, Youth and Family’s policies, practices and services”. The report is 60 pages long , and it appears to ask some pretty serious and searching questions. It has certainly resulted in considerable media coverage this morning.

The Reserve Bank’s Board will, if last year’s schedule holds, just have finalised their Annual Report for the year ending June 2015. Last year’s report was signed by the Board on 26 August 2014.

The Reserve Bank Act lays down the responsibilities of the Board. They aren’t the same as those of the Children’s Commissioner as regard CYF, but the Board acts primarily as the agent of the Minister of Finance and the public to hold the Reserve Bank Governor to account.  They must report to the Minister if the Governor isn’t performing, and may recommend dismissal.

For the last decade or so, the Board has had to publish an Annual Report

The Board must prepare, for each financial year, a report setting out the Board’s assessment of the matters referred to in section 53(1).

And section 53(1) reads as follows

53 Duties of Board
• (1) Subject to this Act, the Board of the Bank shall—
• (a) keep under constant review the performance of the Bank in carrying out—
• (i) its primary function; and
• (ii) its functions relating to promoting the maintenance of a sound and efficient financial system; and
• (iii) its other functions under this Act or any other enactment:
• (b) keep under constant review the performance of the Governor in discharging the responsibilities of that office:
• (c) keep under constant review the performance of the Governor in ensuring that the Bank achieves the policy targets agreed to with the Minister under section 9 or section 12(7)(b):
• (d) determine whether policy statements made pursuant to section 15 are consistent with the Bank’s primary function and the policy targets agreed to with the Minister under section 9 or section 12(7)(b):
• (e) keep under constant review the use of the Bank’s resources.

Last year’s Board Annual Report (pages 6 and 7) was totally anodyne. It was the first report since former Acting (and Deputy) Governor, Rod Carr took over as chair. The report was less two pages long and is almost totally descriptive (and still manages to contain a relatively minor, but telling, factual error, which I have recently drawn to their attention). The Board’s report comes bound in the middle of the Bank’s own Annual Report.

The contrast with the Children’s Commissioner’s report is striking. I think it sheds some light on the weakness of this area of the governance/accountability of the Reserve Bank. The office of the Children’s Commissioner isn’t heavily resourced, but it has resources of its own. By contrast, the Reserve Bank’s Board has no independent financial or staff resources – indeed, its Secretary is one of the senior managers of the Bank. The Board meets on Bank premises – in “the Board room”, although of course the room is primarily used for a range of day-to-day management and policy meetings. For a Board whose primary responsibility is about holding the Governor and Bank to account (ie a very different role from a corporate or even Crown entity board), it is curious (and inappropriate) that the Governor is a member of the Board itself. In the years since the Governor ceased being chair, both subsequent chairs have been former senior managers of the Bank.   Reading past Annual Reports it sometimes seems that the Board sees part of its role as being to help the Governor spread the good news and explain the choices the Governor is making.

It simply isn’t a recipe for being able to maintain appropriate distance from the Governor, to enable critical evaluation and commentary to take place. However good the individuals are – and there are able people on the Board – the structure is set up in ways that make it unlikely that they will be willing or able to stand up to a Governor (at least to one who has any ability at all to manage his relationships with Board members). The Governor has resources, profile, and spends all day on this stuff. Board members gather for a few hours a month, and consider papers submitted and prepared by staff (who all work for the Governor).

This year’s Annual Report might perhaps cover, in some depth, issues such as:
• The way that core inflation has now been well below the middle of the target range for some years
• The significant policy mistake that was made last year, in raising the OCR repeatedly and only very belatedly beginning to slowly cut it again.
• The poor quality of the Bank’s research, analysis and argumentation around the housing market, and around the new investor finance restrictions in particular.
• The obstructive and non-transparent approach the Bank has taken, including with respect to compliance with the Official Information Act

What is about the Governor’s performance, and stewardship of resources, that has led to these outcomes? And what steps are being taken to avoid a repetition?  Many outsiders might have a view, but the Board has unique access to the inner workings of the Bank, and the ability to grill management.

A report of two pages, effectively stating that they have lots of meetings, see lots of papers, and generally think the Governor does a good job, doesn’t really cut it. I’m not a huge fan of the Children’s Commissioner, but in this area he seems to have shown a way that the Reserve Bank’s Board might think about following. It is important to have external review of CYF – children in their care are very vulnerable. But when a single unelected official has as much clout as the Governor of our central bank does – having a huge impact on the short-term performance of the economy, and the numbers of people unemployed, speculating with a huge balance sheet, and with the seemingly arbitrary ability to decide who banks can and can’t legally lend money to, it is also very important that we have serious and substantive evaluative monitoring and reporting on the Governor’s conduct. When he makes mistakes – and he’s human so he will – we pay the price.  The Board is charged with doing that assessment, and we should expect to see evidence of it.

I don’t expect we’ll get what I’m looking for. The system needs far-reaching institutional reform. But even under the current law, the Board could offer us much more evidence of critical scrutiny than we’ve been seeing so far. 60 pages might be a little too much, at least annually, but 10 pages of serious reporting and evaluation, published separately from management’s reports, might be a start. If the Board hasn’t engaged substantively with the sorts of issues I’ve outlined above, the annual report isn’t due until 30 September, so perhaps they should pull what they‘ve done already back from the printers and start again.