Reserve Bank

Reserve Bank, Treasury, and Willis

Michael Reddell Adrian Orr, Funding agreements, Quigley, Reserve Bank, Reserve Bank Board, Treasury

There have been numerous OIA requests around events leading up to and surrounding the (pretty clearly) coerced exit of Adrian Orr on 5 March. The Reserve Bank in particular continues to keep on with a fair amount of delaying and stonewalling, clearly resistant to the idea that the public has any real right to know what happened, in a case involving one of the most powerful officials in New Zealand, with a track record of poor personal behaviour and very costly policy choices. Judging from a couple of their recent responses to me and one I noticed to someone else via fyi.org they seem to be working towards a date around 18 September (at least three requests are extended to that date), perhaps around the expected timing of any final Ombudsman determination on the various appeals already in train. By then it will be well over six months since Orr resigned, and that it is with the Ombudsman apparently taking this matter seriously. It is pretty bad, in both appearances and substance, and had the Bank and the Minister of Finance been at all serious about transparency and accountability we could have had a full reckoning within a couple of weeks of Orr’s departure, and then moved on towards rebuilding the institution and with it its credibility and authority (eg that “social licence” Orr used to like to bang on about).

And yet, various responses do come in. While I was away last week there were responses – each with some information – from the Reserve Bank itself, from The Treasury, and from the Minister of Finance. In their different ways, whether by acts of commission or omission, they do not show any of those three parties in a good light.

You’ll recall that it was the Reserve Bank’s egregious Funding Agreement bid, and the resistance to it by the Minister of Finance and Treasury, that finally sent Orr over the top, resulting in behavioural breakdowns (described in the Herald the other day, with apparent extreme understatement, as “including at least one indecorous outburst”) that led to his coerced resignation.

I’ve been trying for months to get to the bottom of this; both how they ever made such an egregious bid in the first place, and how Treasury and the Minister did so little for so long, such that this only came to a head in late February (the bid having been submitted in September).

We know:

  • that in her letter of expectation to the Bank’s Board in April 2024 the Minister set out her expectations about future spending.   Against the backdrop of what was happening to other agencies most people would read this as suggesting that the Bank could expect less authorised spending under the new Funding Agreement than under the old one.
  • The Reserve Bank nonetheless went ahead and set its own 24/25 budget (which it could, in law, do) 23 per cent above the amount of operating spending authorised for that year by Grant Robertson in a variation to the previous Funding Agreement made just prior to the 2023 election.
  • The Reserve Bank did not tell the Minister of Finance this, by the simple device that when –  as the law requires – they gave her the opportunity to comment on their 24/25 draft Statement of Performance Expectations, they simply left out the planned budget amount. (It was filled in in the final published version but…..who reads such things).
  • The Treasury seems not to have raised any concern about this egregious 24/25 budget –  it isn’t even clear they asked about it or were aware of it at any time during 2024 – and certainly did not alert the Minister to what had happened.
  • The Reserve Bank (and note that this was the Board, unanimously, and not just the Governor) in September 2024 lodged a bid for the 2025-30 Funding Agreement that was quite explicitly set on the basis of involving a level of future operating spending 7.5 per cent below their own (grossly inflated) 24/25 budget.
  • Numbers consistent with this bid found their way into the HYEFU expense tables in December last year (Treasury telling me that they simply took the numbers the Bank gave them).
  • Treasury appears not to have engaged seriously with the Funding Agreement bid until February this year.

It was pretty much beyond comprehension all round. How could the Reserve Bank Board have the gall to have a) set such an initial budget inconsistent with the recently updated funding agreement and b) then used that as the base for a bid for such a higher level of resources (incidentally going on to commit to large and expensive new office space in Auckland without any certainty as to their future approved spending)? How could the Minister of Finance, who had very evidently been no fan of Orr, have let all this happen (where was her suspicion/curiosity, where was that of her advisers)? And how could The Treasury, supposedly the guardians of the public purse and specifically charged with monitoring the Bank (and Board minutes show Treasury DCEs turning up for chats at Board meetings), have been so oblivious to what was going on (would this have been an acceptable standard in any other government department monitoring its Crown entities)?

The Bank has been quite obstructive in releasing the relevant material (Treasury, more cooperative, reveals that it really had none) and are still refusing to release the final Funding Agreement bid that went to the Bank’s Board (I really only want it to check whether the Board exercised any discipline on management excess but the minutes suggest not). However, in consultation with Treasury, they have now released a letter of expectation sent by the Minister of Finance to the Board chair headed “Expectations for the 2025-30 Funding Agreement proposal and review process”.

The version they released has no date on it (I asked yesterday, but perhaps they’ll take another 20 working days to reply), but it must have been after the April 2024 general letter of expectation (see above), although perhaps not much after it.

[UPDATE 8/9: The Bank has confirmed to me today that the Board chair received the funding agreement letter of expectation from the Minister of Finance on 3 April 2024.]

If you were dealing with honourable people, it would be a perfectly reasonable letter.

The Minister outlines the general fiscal context:

In pretty much any core government agency the budget for 24/25 would have been the appropriations made by Parliament for that department for that year. The Reserve Bank was different, because it had a five year Funding Agreement, in which approved operational spending for each individual year was specified. The Minister (and Treasury, as drafters of the letter) should still have been safe because you’d surely be able to count on the Bank having set a 24/25 operating expenses budget very much in line with the limits in that previous Funding Agreement for 24/25?

With decent people, but not it appears with the Reserve Bank Board (Quigley, Orr, and the rest). They simply set themselves a budget for 24/25 that bore no relationship at all to what they’d previously been allowed to spend for that year, and then took the Minister at her (literal) word and put in a bid 7.5% lower than that grossly inflated budget. And thus, per the covering Board paper dated 12 August 2024, Bank management (in this case, two of the – very many – deputy chief executives, Greg Smith and Simone Robbers) offer this assurance to the Board

And on the letter of the Minister’s request, it was indeed so. But it was fundamentally dishonest and any half-alert board members (including, but not limited to, Quigley and Orr) must have known that. It is almost inexcusable that any of the Board members involved – both in setting the 24/25 budget itself, and playing fast and loose with the clear intent of the Minister’s letter, in turn leading to the massive dislocation to the organisation and its staff this year – are still in office (driving the determination of the nominee to be the next Governor).

These are the guilty men and women who are still in office, drawing (incidentally) the highest board fees for any non-commercial government agency in New Zealand:

Nei Quigley (who, for reasons apparent to no one else, the Minister continues to express confidence in)

Rodger Finlay, the deputy chair

Jeremy Banks

Susan Paterson

Byron Pepper

Meanwhile, Treasury seems to have been asleep at the wheel, and doing a particularly poor job in pro-active advice to the Minister, in drafting things in a way that ethically challenged people could not drive a cart and horses through, and in undertaking constant and reasonable challenge and scrutiny of the Bank. And the Minister and her team hardly emerge looking good, when they been clear all along that they’d had doubts about Orr.

Where, you might also wonder, were the Opposition and FEC? But the primary responsibility rested with the Board, the Treasury, and the Minister. And if we can’t count on more honest and straightforward behaviour from those charged with monetary stability and the regulation of our financial system, or more effective scrutiny from those responsible for safeguarding the public purse, things are even further gone than this pessimist had come to fear. Mistakes will happen, but then the question is whether those in a position actually take them seriously and do something. There is no sign Nicola Willis has done that (after all, all those board members are still in office, and although their bid was cut back there were no consequences for them for the havoc they wreaked or the ethically-challenged try-on).

The second part of this post skips forward some months. But before we get to that take note of what the Bank and Quigley had done in the earlier section, hardly (one would have thought) conducive to good and trustworthy relationships going forward between the Bank and Treasury, if Treasury now realises they have to dot every i and cross every t, and check every single document that the Bank is not attempting to pull a fast one).

You might remember that a month or so ago I reported what an apparently well-informed insider had told me about what really happened around the Orr departure. Pretty much all of that story has checked out as things unfolded. One element of the story was that Neil Quigley had gone ballistic when he learned that Treasury had kept a fairly full file note of a critical meeting held on 24 February between the Minister of Finance, the Reserve Bank, and the Treasury. So I lodged an OIA request with The Treasury, and this was the response

Treasury response to OIA request re 20 and 24 RB meetings

From it

Personally, having taken many file notes of meetings with Ministers of Finance and Treasury earlier in my career, neither the fact of the file note nor its contents seemed particularly surprising or inappropriate. Major issues (not just the funding agreement but bank regulatory ones) were being discussed, the language is not inflammatory – although the Orr walkout (itself described in muted terms) certainly was.

The fault here seems (and not surprisingly) all with Quigley. As ever with him, there is never a sense of why the Official Information Act exists, or whose interests it is supposed to serve. Instead, we get implied threats of (a) “this will require the full force of RBNZ legal advice to be brought to bear on it”, and b) the suggestion that release would “immediately destroy the goodwill between Treasury and the Bank that I have tried to create over the past few years”. You might wonder how Quigley is feeling now that the full file note has been released, but even set that to one side……goodwill????? This was the same Board chair whose chief executive had behaved so egregiously in a meeting with Treasury that Quigley had felt compelled to provide a written apology, and whose Governor (in that 24 Feb meeting) had (in muted Treasury language) “expressed frustration at the relationship between the RBNZ and the Treasury”. And this was the Board chair who had pulled the wool over Treasury’s eyes by agreeing to a budget for 24/25 quite out of step either (and more importantly) with his own Funding Agreement, or with the spirit of government fiscal policy last year, and then used that abuse as the base for a bid for a big increase in authorised spending for the coming years.

Quigley then puts one of the Bank’s attack dogs, their General Counsel, onto the issue and we have his crucial email as well

So, the Bank’s General Counsel tries to threaten Treasury that the Bank would not in future be willing to hold meetings with Treasury and the Minister of Finance on its future funding? Yeah right, but it is an attempt to intimidate Treasury.

And then, of course, there is that second paragraph. Which goes to the whole point, that the Reserve Bank’s Board appears to have engaged in attempts to make end runs around any serious public scrutiny, including via the OIA, by doing sweet-heart deals with Orr, the terms of which they also refuse to disclose. Fortunately, sweetheart deals done by Quigley et al don’t bind The Treasury, without whom it seems we would have no idea what went on at that critical meeting, when things were so bad that within 24 hours the exit process was getting underway.

Quigley repeatedly displays no regard for the public interest, and any relationship to the truth or straightforwardness on Reserve Bank matters seems entirely incidental (ie whether or not it serves his ends of the moment – see the repeated active misleading of the public, both on 5 March and since).

And, just briefly, one final OIA, this time from Willis herself.

My informant had told me that on the afternoon of 5 March there had been heavy pressure from the Minister’s office for the board chair (Quigley) to do a press conference on the resignation. One of the Bank’s earlier OIAs had also mentioned such approaches. The Minister’s response confirms that there were two conversations that afternoon involving her Senior Press Secretary and the Bank’s communications head to that end, and it also releases the draft press release and Bank comms plan that Neil Quigley had provided to the Minister’s office late on the morning of 5 March which included this: “Recommended media response plan for if [ “if”???? Really?] we get questions: No further comment”. The ill-fated press conference, at which Quigley did so poorly and actively misled the public, was clearly Willis’s initiative.

But that was not my main interest. I also asked for copies of “any material relating to exit conditions for Orr (process or substance)”. The Minister’s response was “No information about the Reserve Bank Governor’s exit conditions is held”. Which really is inexcusable. As a reminder, the Minister (and Cabinet) appoints the Governor, the Minister (and Cabinet) are the only ones who can dismiss the Governor, and the Governor’s resignation has to submitted to her specifically. The Minister is also responsible for the Board, and appoints – and can dismiss at will – the Board chair, and is the only person in the entire mix with any degree of direct public accountability. And yet we are expected to believe she is so incurious as not to enquire at all as to what sort of cover-up arrangements Quigley (and the “senior counsel” both sides engaged) was cooking up with Orr, as the basis for his departure, or even at what cost. And when a key precipitating event was a meeting she was part of?

I’m not sure I really believe it – not “holding material” is likely to be different from no phone calls were made, directly or indirectly, (and there is set of texts involving Iain Rennie on this topic that are still being withheld in full by Willis) – but if it is true it reflects very poorly on her as a steward of the public interest.

(And that is even granting that the wider public interest was almost certainly served by Orr’s departure, a couple of years after he would already have gone had the previous government not, inexplicably, reappointed him.)

One in five roles could go at the Reserve Bank

Michael Reddell Funding agreements, Reserve Bank, Reserve Bank Board

That is the headline in a story in The Post this morning. After inquiries from Post journalists a Reserve Bank spokesperson said that final decisions on organisational change, advised to staff last week, would mean a net loss of 142 jobs (35 of which were currently vacant; presumably the Bank has had some sort of hiring freeze in place for some months now).

The last public number we had for Reserve Bank staff numbers was in the Minister’s Funding Agreement Cabinet committee paper: 660 FTEs as at 31 January. Presumably a) there were some vacancies even then, and b) the number of jobs was greater than the number of FTEs, but even if there were 700 filled or unfilled jobs in January the recent decisions would still be a cut in excess of 20 per cent. That is brutal in any organisation, especially when its statutory roles and functions haven’t changed a jot. It is hard to imagine morale is particularly high in the Bank at present, and we might even sympathise with the more junior of the staff losing their jobs, especially those hired in the last year or two, really on what amounts to false pretences. Even those (probably a minority) doing useless jobs far beyond the scope of the Bank’s actual statutory functions.

You don’t really expect junior hires to a core government agency to have to do due diligence on whether that agency was running spending levels – and hiring plans – far in excess of what had been approved for them by the Minister of Finance. But that is what had happened: Board approved spending last year was 23 per cent higher than what the previous Minister of Finance had approved for 24/25 when he increased the Funding Agreement amounts just before the last election. Treasury didn’t seem to have noticed, or done anything to call it out, so one can only sympathise with new hires now being thrown back onto the job market.

And you can see how last year’s excess created today’s problems. The number of FTEs increased from 601 to 660 between 30 June last year and 31 January this year. Had they not gone on that last hiring binge, adjustment now would be much less painful all round. This table, showing FTE numbers, is from the 2023/24 Annual Report published last September.

It is a reminder of how rapidly Orr and Quigley had been ramping up staff numbers, with no substantial change in functions. Cut FTEs by 20 per cent from that 31 January level (660) and it would take the Bank down to 528 FTEs, at which point it would still be larger than it had been on 30 June 2023, the final balance date under the previous Labour government (under whose term almost all agencies had seen rapid growth in staff numbers). It makes the point that the cuts the current Minister of Finance approved have not been deep at all relative to what was going on (spending allowances, staffing) on Labour’s watch. (I reckon the Bank’s core functions could probably be done professionally with 350 staff, but save that debate for another day.)

One way of seeing this is to look at the Bank’s total operating expenses. In the final budget approved during Labour’s term, the Bank budgeted to spend $212 million in total operating expenses in 2023/24. For 2025/26. the recently published budget for total operating expenses is $204 million, 3.8% lower than in 2023/24. Add in, say, 5 per cent inflation over the two years and you are still looking at a real cut of under 10 per cent. Not easy to adjust to perhaps, but not very different from what a lot of other government agencies have experienced. The wild card of course was the budget for 24/25: $231 million. This year’s budget is about 14 per cent lower than that in real terms. But that 2024/25 budget never had any ministerial authorisation at all.

Another, but murkier, way of looking at it is to look at approvals under the Funding Agreement (which cover a – changing – subset of total operating expenses, but which are where the Minister of Finance is supposed to have control).

In the August 2023 update to the last Funding Agreement, Grant Robertson approved the Bank spending $149.44 million on in-scope operating expenses. In addition, they were explicitly allowed to spend on these items about $5 million of the amount that had been allowed for currency issuance expenses but which wasn’t needed for that purpose. So, say, $154,5m on in-scope operating expenses.

In the new Funding Agreement approved by the Minister in April this year, total in-scope operating expenses allowed for this year is $155 million (dropping away to $145 million next year, for reasons not made clear in the documents published so far, but maybe reflecting upfront restructuring costs – redundancy payments now for all those losing their jobs, already some weeks into 25/26?).

But you can’t just compare and contrast $155 million with $154.5 million because in the new Funding Agreement more spending items have been moved out of scope, not required to be covered within that $155 million limit. There are some smallish items (eg costs associated with the Bank’s legacy superannuation scheme, totalling probably less than half a million this year). But there is also this

Remember, these are business case costs, not some full cost of a project but you’d think they might easily total another million or two (consultants don’t come cheap).

And there is this explicit carveout, with some numbers

ie $5 million a year

Add those three items back in and the appropriate comparison to last year’s Funding Agreement level (the $154.5 million) is perhaps more like $161.5 million ($155 + 5 + 1.25 + 0.25). It drops away next year, but taking $10 million off that total still doesn’t leave them much less than the $154.5 million they were allowed for 24/25. The big problem – for them – is that they simply ignored that 24/25 limit and went for broke, hoping they could trick the Minister into setting them a permanently higher new baseline level of spending. It didn’t work fortunately. In a decent world they’d all (Orr, Quigley, the rest of last year’s board) apologise to the Minister, to the public, and to their own staff. In our world, staff lose their jobs and Quigley and the board keep theirs.

It is still interesting that they are needing to make such deep staff cuts to meet the budget and stay within the new Funding Agreement limits. Perhaps one partial reason might be the big new commitment they made to office space in Auckland – in what is apparently one of the fanciest new buildings in Auckland, with a five star green rating as well – on a scale which to have been anything like justified would have required even more growth in staff numbers. They signed up to that 4800 square metres last November, with no idea where the Funding Agreement would land and knowing they’d already well-overreached the previous Funding Agreement limits. According to last year’s Annual Report they spent $1 million on Rental and Lease Expenses (presumably mostly/wholly on their existing office space in a 40 year old building in Queen St). Not exactly a source I’d rely on for much but Google’s AI overview suggested that annual lease costs on the space in the new building could be $3.5 million (and their lease there runs from 1 August, while the existing lease doesn’t expire until 31 December).

In concluding I want to come back very briefly to the Post article. It is right to say that the Bank got much less than it had had the gall to ask for (unlike Oliver Twist, in asking for more they were already bloated), but what they are allowed to spend this year and next isn’t much different in real terms than what Grant Robertson had allowed them when he’d set the spending limit for 24/25. It is just a shame – actually, it should be scandalous – that they chose to ignore that limit so egregiously. Taxpayers and their own staff now pay the price.

Still waiting for a Governor

Michael Reddell Reserve Bank, Reserve Bank Board, Rodger Finlay

Today, 5 August, is five months since the shock resignation – or, as now seems much the most likely, engineered exit – of the then Governor of the Reserve Bank, who disappeared from office that very day, getting generously paid for several more weeks but not working until the official date his resignation became legally effective, 31 March. Since then we’ve heard not a word of explanation from him and (more importantly, since they are still public officials) have been deliberately, actively, repeatedly, and still to this day obstructed and mislead by the Reserve Bank Board, notably the chair Neil Quigley, enabled by the Minister of Finance, and implemented (in respect of OIAs) by the temporary Governor, Christian Hawkesby.

Applications for the position of Governor closed a couple of months ago, so I guess we must assume that the selection and recommendation process is now fairly well advanced. The Board established a Governor Search Committee

Being chaired by Rodger Finlay – who has no background in macroeconomics or regulatory policy, and who had a questionable start to his time with the Bank (still chairing the board of the company that owned the country’s fifth largest bank) – doesn’t inspire much confidence. And if Finlay appears like a decent general corporate governance type of person, recall that he has been deputy chair through a) the reappointment of Orr, b) the Board approving the Bank running spending levels last year far beyond what the Funding Agreement had envisaged or allowed, and c) (and so we learned yesterday) was part of the Board that allowed management to sign a new lease on Auckland offices last November, massively larger than the current office, with space for many more staff than they currently had, when i) the Bank was already spending more than their Funding Agreement had allowed, and ii) they (presumably) still had no real steer from the Minister of Finance as to what approved spending for 25/26 and beyond was going to be. [Oh, and he’s been party to the cover-up of the last five months.]

Quite a team he and Quigley must make. Not exactly a team to inspire any confidence in the wisdom of whoever they end up putting forward as a first nominee to the Minister of Finance, or a team that might assure a good potential Governor that he or she was going into a well-led governance structure. Responsibility for that is shared by those Board members and by the Minister of Finance who has continued to express confidence in Quigley (for reasons not comprehensible to anyone outside her bubble) and refused to proactively ensure vacancies were quickly filled by new able people.

We had a Governor resign once before. Don Brash announced his resignation and left office on 26 April 2002. Just under four months later, Alan Bollard was announced as the new Governor.

Defenders of the Board and Minister might point out that things are a little more complicated this time. By law, the Minister now has to consult with the other political parties in Parliament (in practice the Opposition parties, since the coalition parties will already have been involved through the Cabinet appointments process).

The law does not require the Minister to change her mind if the other parties (some or all) disagree (perhaps strongly) with a nomination, although the statutory provision would be empty if she did not pay at least some heed to concerns expressed. (There is no sign Grant Robertson did – and it was his new provision – when he went ahead and reappointed Orr, over objections from both ACT and National in late 2022, but if the provision is to have any meaning at all, you’d hope there would be some serious reflection on any objections, especially when an incumbent is not involved.)

However, if the paper work is a bit more time-consuming now than it was in 2002, bear in mind that the appointment of Bollard was accomplished in less than four months even though Michael Cullen had rejected the Board’s initial nomination.

By law (see above) the Minister and government can only appoint someone the Board recommends. But that does not mean that the Minister has to accept any particular recommendation. That isn’t the empty provision people sometimes suggest. There have only been three new Governor appointments since the legislative model came into effect (in 1990) and Michael Cullen recorded in his autobiography that he rejected the then Board’s nomination of Rod Carr (deputy and at the time acting Governor).

As was his perfect right to do. (The Board must have at least half-expected their nomination to be rejected as it was understood among senior management at the time that Helen Clark had made clear that she wasn’t going have any “Brash-clones” appointed.) I’ve long championed the much more conventional model in which the Minister gets to appoint their own preferred person as Governor directly (perhaps accompanied by scrutiny hearings by FEC before the person actually takes up the office).

But it was all done in less than four months, and it is now five months and counting since Orr left (and the Bank in 2002 was in nothing like the mess, or urgent need of new strong capable respected leadership that it is now). I hope the Minister is drumming her fingers and urging the Board to get on with it.

Quite who they might come up with remains a mystery, or whether the couple of new Board members this year might persuade their colleagues that whatever the Board has once seen in Orr he should be almost a benchmark antithesis of the sort of person who should be chosen.

I wrote a post a couple of months ago, shortly before applications closed, prompted by the advert for the job and what it suggested the Board might be after. As I have noted throughout, I don’t believe there is any obvious ideal candidate, and so inevitably compromises will have to be made (and in recruiting a person, the Board and Minister need then to have regard to the willingness and ability of the person to clean house and build a new and more capable second tier – we cannot for long be in a position where the deputy chief executive responsible for macroeconomics and monetary policy has (a) no background in the subject, and b) can’t intelligently comment on anything of substance other than from a script she has been given).

That said, straws in the wind aren’t terribly encouraging.

I’ve heard that a couple of very able applicants didn’t even get an interview (there is such an abundance of talent? Really?). And then there was media report (that I’d heard via markets people earlier) that a Bank of Canada Deputy Governor (they have many) was a strong possibility, perhaps even a frontrunner.

This would seem an ill-advised choice if it was really a direction the Board was considering taking. Gravelle seems to have no particular connections to New Zealand (other than a couple of conferences, one by Zoom), and comes from an organisation that – unlike the Reserve Bank of New Zealand – does not do banking (and non-banking) financial regulation and supervision, these days a big part of the Bank’s job. For all its undoubted analytical strengths, the Bank of Canada also has a quite different sort of monetary policy governance model (entirely internal) than New Zealand’s. And then there is the adverse selection issue: a person who was good enough to be a serious contender for Governor in his/her own country (G7 country and all that) would not be very likely to put themselves forward to be Governor of a much smaller, poorer, remote country’s central bank, a country with which they’ve had no particular ties. As a couple of people have put it to me, it is a bit reminiscent of the old imperial days – someone not quite up to being appointed Governor-General of Canada or Australia might still be handed down to New Zealand. And it is not as if parachuting in foreign appointees to top economic roles here has been a particular success story (see last two Treasury secretaries), nor in many ways was bringing back an expat after 15 years away to the Reserve Bank (even if Orr’s record makes Wheeler look less bad). Can we really have fallen so far that we can’t find a credible respected appointee at home?

Always possible I guess. Compelling choices certainly aren’t thick on the ground.

What of the temporary Governor, Christian Hawkesby? These were my comments a couple of months ago

Much of which I would repeat today. But unfortunately since early June we’ve seen not just that Hawkesby has been a part of the obstruction effort re Orr’s departure (and if he is working to Board direction the fact that he has not been willing/able to insist on a more open approach is a poor reflection on any claim he has to be thought a worthy occupant of the permanent role. And then of course there was that last sentence. We now know that not only did he repeatedly sit alongside Orr while he (Orr) mislead Parliament, but that Hawkesby himself misled them just three months ago. He proved unable to even pass that low bar I mentioned in June.

I ended that earlier post speculating on some possible sorts of names I hadn’t seen mentioned in any of the media articles (bearing in mind that the advert had talked of the importance of both financial markets knowledge and CEO experience)

Since Stobo is (a) an economist by training, b) has CEO experience, c) has financial markets expertise, and has been appointed to his current public sector role (chair of the FMA) by this government, and is a thoughtful and reflective person .you could see why he might be a strong contender if he wanted it (and was willing to give up his portfolio of directorships etc and media commentary). If one can’t have much confidence in the FMA, there’d definitely be worse people for the job.

But it is time to get on with it and get a new Governor in place. And then get on and refresh the Board, with a new chair to work with and oversee the Governor.

Big scary numbers

Michael Reddell Banking, Reserve Bank

When our kids were little one of the books we often read them was “Bears in the Night” in which the young bears, hearing a noise outside, sneak out of the house at night, climb Spook Hill and then, terrified by the sudden appearance of an owl – not the most threatening of birds – whose call they’d heard, rush back to the comfort and security of home and bed.

It came to mind when reading some of the arguments being advanced by government officials and banks over the Credit Contracts and Consumer Finance Amendment Bill currently making its way through the Finance and Expenditure Select Committee.

The key controversial bit of the bill is the proposal to legislate retrospectively to close down class action suits currently before the courts against ANZ and ASB in respect of flaws in loan variation procedures etc that occurred between 2015 and 2019. The Credit Contracts and Consumer Finance Act had been amended in 2015 in ways that provided (MBIE’s words here) “that the borrower is not liable to pay interest or fees over any period of non-compliant disclosure made before loans are entered into or varied”. In late 2019 the Act was further amended so that for future breaches courts would have “explicit discretion to extinguish or reduce the effect of this provision in order to reach a just and equitable outcome”. That amendment was deliberately and consciously not made retrospective, but the current government now proposes to further amend the Act to apply the post-2019 regime to breaches that arose between 2015 and 2019.

Retrospective legislation is, almost without exception, an odious concept. Perhaps one might make an exception where, say, there was a clear typo in the legislation, giving a quite different meaning to the words of the legislation than Parliament had clearly intended. That wasn’t the case here. Rather, right or wrongly, Parliament changed its mind in 2019 about what the law should be going forward. Now the government – egged on by the banks – wants to make it as if a consciously and deliberately chosen law never was.

(Perhaps one might also make an exception to the general principle against retrospectivity if it was belatedly realised that the words Parliament had enacted enabled the strong to egregiously exploit the weak. I don’t know that that exception is in the typical lawyers’ list, but as a citizen/voter I could see the possibility (perhaps a parallel to exercise in criminal cases of a royal prerogative of mercy).)

What is puzzling is why the government would propose to amend the law retrospectively to help out large and highly profitable foreign banks. And in so doing to bypass what is apparently usually the practice when (as happens on rare occasions) retrospective legislation is passed, when cases already before the courts are (apparently) protected.

I hadn’t paid an awful lot of attention to the whole issue until two or three weeks ago when big scary numbers generated by the Reserve Bank were reported (eg here) and thus entered the public debate under headlines (not, to be clear, sourced to the Reserve Bank) about threats to the financial system unless this retrospective law was passed. $12.9 billion (the maximum estimate reported) sounded like a lot of money (but just glancing at articles I didn’t have a basis for knowing what a right number might actually be), even if stories about threats to the soundness of the financial system never rang true even for a minute.

And I still didn’t pay a lot of attention until the media reporting this week of the appearances before the select committee of the Bankers’ Association (strongly in support of the proposed amendment), the lawyers for the plaintiffs in the class action suits, and representatives of the litigation funders, LPF. The video of those appearances, and associated questions and answers, is currently here.

Yesterday, one of LPF’s representatives rang me, apparently given my name by several people as someone who might write a critical piece for them, especially on the Reserve Bank numbers, and the uses and abuses being made of them. I don’t really do submissions for hire, and am not taking any money from them, but my interest was piqued, and I benefited from a couple of useful conversations with them. More importantly, they sent me the document that contains the material from the Reserve Bank, a paper from MBIE to the then Minister of Commerce and Consumer Affairs (Andrew Bayly) from October last year which includes “Annex Two: Summary of RBNZ modelling and advice”. That annex appears to have been written by the Bank. The full document is here

MBIE Paper on CCCFA retrospectivity amendment 10 October 2024

Here is what there is on the estimates

In other words, we know nothing about the model, the scenarios, assumptions etc although it appears – from the OIA exclusion ground cited – that they must have obtained some data from one or other of the banks to somehow inform their numbers.

Note, though, that even the “big scary number” scenario, isn’t exactly a grave financial stability risk: “low to medium impact on capital ratios” is the Reserve Bank’s own line. Big numbers but if the underlying business models are profitable (as New Zealand banking typically is) then even in a hypothetical like this recapitalisation wouldn’t be expected to be an issue (whether from direct shareholder injections or retained earnings). Aside from anything else, and as they note, litigation will roll on for years. Losing on the scale of this “big scary number scenario” would be painful, but from the outside you could conceptualise it as a bit like a backward-looking windfall tax which, justified or not, wouldn’t normally really affect future behaviour. And when bureaucrats and the like come up with three scenarios, or three policy options, they typically expect people will be drawn to the middle one as perhaps best expressing their view or preference (and to be clear in this Annex the Reserve Bank is not taking a position on the merits of the proposed retrospective amendment).

It really isn’t clear how the Reserve Bank came up with the big scary number. Over the period in question – 2015 to 2019 – total housing and consumer loans averaged about $275 billion. If the average interest rate over this period was about 5 per cent, the average disclosure failing occurred half way through the period, and a third of all retail loans in the economy (by value) were subject to disclosure failings, the total interest involved would have been be about $10 billion, which is (I guess) in the same order of magnitude as the Reserve Bank’s $12.9 billion number (especially if one allows for interest on such an amount through to today).

But we know, for multiple reasons, that this cannot be a number to take seriously.

For a start, if the Bankers’ Association and its members thought it was even roughly accurate as an estimate of the sector’s exposure, they’d have hired a consultant economist to churn out quickly a well-explained and documented version of their own (rather than just waving around the worst Reserve Bank numbers, where any details as to how it was done are – perhaps conveniently for them – blacked out). It wouldn’t take long, and the Bankers’ Association clearly isn’t short of money to deal with this issue: at their FEC appearance they brought along three [UPDATE: two apparently] KCs to help testify and answer questions on legal dimensions. One of those KCs – James Every-Palmer – actually told FEC (at about 24 minutes in) that the sums being sought in the cases against the ANZ and ASB were “as I understand it, hundreds of millions of dollars” (before then handwaving to tie this to a system-wide $12.9 billion dollars). ANZ and ASB together make up the best part of half the banking system, so if the Bankers’ Association understands the claims against them to be “hundreds of millions” then even if that represented $1 billion in total, it is all but impossible to see how the rest of the system could be exposed to $12 billion of claims.

There are several reasons for that statement: no other claims have been lodged, the litigation funders told the committee they had heard of no other claims (and any such claims could really only go forward with litigation funding given the cost of civil justice), and the existing legislation is written in such a way that any further claims, not already lodged, would almost certainly be out of time (more than five years on from when breaches were disclosed). I’ll leave those points to the lawyers to argue about, but there is also some hard data on the numbers of customers involved.

The Commerce Commission reached settlements with the four big banks (and Kiwibank) some years ago, and those settlements (which involve compensation for actual loss, and did not preclude civil action by customers) are all sitting on the Commerce Commission website to consult.

Take the ANZ first. This is what had happened.

102000 customers were affected. That appears to have been around 30 per cent of ANZ’s mortgage customers in 2015, and at 31 December 2015 ANZ had about $63 billion of retail credit outstanding.

Under the existing provisions of the CCCFA, customers were not liable for interest in the period between an erroneous notification and either when it was corrected and they were notified, or when they next made a (validly informed) change to their loan. Someone who changed the fixed term of their mortgage in December 2015 (getting incorrect disclosure) is likely to have changed it again before the end of 2019 – say, on average, December 2017 – and received correct information then.

However, as I understand it, the (potential) ability to claim back all interest also only applies to those loans which had been taken out from 2015 onwards, so it is likely to be only a minority who are covered by the current class action suits, given that the poor disclosures only occurred for one year.

It isn’t impossible – depending on the specific assumptions – to get up to a total towards $1 billion of exposure, BUT we already know that is a) more than Bankers’ Association lawyer suggested the claims were, b) more than implied by the plaintiffs’ settlement offer this week (around $300m, suggesting that was around two-thirds of the total exposure).

The ASB situation is a little murkier. For ANZ, the bank knew exactly who’d been affected (and so past actual reimbursements were for actual errors). At the time of its Commerce Commission settlement, ASB did not know how many or who had got the wrong disclosure, only that in total 73000 customers were potentially affected.

The breach went on for longer so a larger proportion of those customers are likely to be able to potentially claim back the interest and fees paid over those years (the median such customer in principle having a claim for about two years of interest). But we have no idea how many customers actually got the correct disclosure – ASB seems not to have had the systems to know, but presumably if this case proceeds will go to lengths (costly lengths) to ensure that the actual victims of procedure “not consistently followed” are identified and only for them might there be an exposure (in the Commerce Commission settlement all 73000 were paid a fixed and modest lump sum, presumably cheaper then than trying then to go through every customer file).

If 20 per cent of the affected (post 2015) customers got the incorrect disclosures, I could produce an estimate as high as $700-800 million. But again, as with ANZ, these numbers seem higher than material in the public domain from those better placed to know already suggests. And even taken together with a high-end estimate for ANZ, nowhere near half of the $12.9 billion for the Reserve Bank’s high-end scary number scenario.

And those are the two banks against whom a case is actually being taken.

Of the other two big banks, BNZ accepted a warning from the Commerce Commission. The number of customers involved was much smaller (11956 in total) of whom 2300 had been directly compensated by BNZ. Meanwhile, the Westpac settlement involved new credit card customers only (so, on average, far smaller loan balances) and only 19000 of them. Kiwibank – while smaller in total – has a substantial retail customer base and seems to have had a similar issue to ASB. It had 35000 new borrowers with a variation potentially affected. But it is hard, even adding all three up, to get to more than another $1 billion maximum exposure. And, to repeat, no class action civil case has been taken against those banks, or indeed any of the smaller lenders, about whom MBIE purported to be so worried. Even if things were not out of time, smaller lenders who’d breached might in any case have been unlikely to have sufficient customers to attract a potential litigation funder).

Only someone with access to really detailed information at an individual bank level could come up with a reasonably robust system-wide estimate of potential exposure in the now, almost impossible event, that cases were to have been taken against any other institutions. But it still looks as though even the Reserve Bank’s second scenario – which they describe as “low impact” on capital ratios – would err on the high side. Based on what the Bankers’ Association lawyers have said, based on what the plaintiff’s lawyers have said, and taking account of the absence of other claims and the likely out-of-time nature of any further claims, it is difficult to see how a worst case involving actual claims before the courts exceeds $1 billion in total.

You can understand why the ANZ and ASB and their shareholders would prefer not to pay such a sum, and would (a) fight it in court, and b), if they could, lobby for a retrospective law change. But it simply isn’t a financial stability issue. It is worth remembering that 15 years ago a big tax case went against the banks, costing them $2.2 billion in an economy then about half the size (nominal GDP) of today’s (and in the midst of a severe recession). Banks affected emerged just fine. When MBIE advised the Minister last October to act to “immediately alleviate distress in the market”, there was (and is) no sign of distress in the market – as it affected ability or willingness to lend, of large players, players being sued, or other lenders – just some “distress” in the local board rooms of ANZ and ASB.

(And note that MBIE’s own advice a month later – page 31 here – was that the proposed amendment was “not clearly necessary to address concerns about the financial position of either ANZ or ASB” and “we acknowledge that applying this amendment to the active class action has “upside” potential for the banks only”.)

Without someone launching an OIA – which the Bank might well stall for several months – we have no way of knowing what the Reserve Bank makes of the use being made by the Bankers’ Association of the $12.9 billion number, or even whether they would still stand by it as a plausible scenario now, 9 months on. But it is pretty clear that – with material then in the public domain – a number on that scale never made any plausible sense, and that the only cases that are actually before the courts – the only cases now likely ever to be – probably involve total stakes less than 10 per cent of that “big scary number”. The banks affected will know that too, but in expected value terms it is no doubt better them to just repeat over and over the “big scary number” and hope to scare the government into passing this retrospective law than to come straight out and acknowledge the plausible maximum scale of any exposure if they lose in courts (and several rounds of appeals) and if the courts made awards fully consistent with the plaintiffs’ claims.

I took from the select committee appearances the other day that while the plaintiffs and their funders oppose the use of retrospectivity on principle, they would (unsurprisingly perhaps) be content with a carveout that meant that the proposed amendment did not apply to cases already before the courts. You can understand why ANZ and ASB would not like that, but why shouldn’t the government and Parliament, particularly once they realise that the big scary number is just a fairy tale, although being used rather more maliciously than a typical parent readings Bears in the Night to their young ones? And yet lawyers for ANZ have the gall to suggest that the plaintiff’s settlement offer this week is “a cynical attempt to influence the law reform process currently before Parliament”. One might well understand why the plaintiffs might make a settlement offer when ANZ and ASB seem to have the government lined up in their corner, but there is no mistaking that brandishing the poor old Reserve Bank’s big scary number is much more evidently an attempt to keep the select committee in line and make public opinion a little less unsympathetic to a law change designed specifically (and only) to help two big (foreign) banks.

For anyone interested, there is a column by Jenny Ruth ($) on related issues this morning.

Finally, regular readers will know that I am not exactly a “bank basher” and have often here derided the rather desperate anti-Australianism implicit in a lot of the NZ political attacks on banks. I think we have a pretty good banking system generally. I’m not necessarily a big fan of the CCCFA in any of its forms (and thought the actual plaintiff who was wheeled up to the select committee the other day was singularly unpersuasive – unlike his lawyer). But I don’t like people playing fast and loose with “big scary numbers”, when they know (or could reasonably be expected to know) that they, and claims made for them, bear little or no relationship to reality. And I don’t like retrospective legislation one little bit.

MPC members speaking

Michael Reddell Monetary policy, MPC, Reserve Bank

In both The Post and the Herald this morning there are reports of interviews with executive members of the Reserve Bank’s Monetary Policy Committee: the Bank’s chief economist Paul Conway in The Post and his boss, and the deputy chief executive responsible for monetary policy and macroeconomics, Karen Silk in the Herald. In a high-performing central bank the holders of these two positions should be the people we look to for the most depth and authoritative background comment on monetary policy and economic developments. But in New Zealand we are dealing with the legacy of the Orr/Quigley years where we struggle to get straightforwardness, let alone depth and insight.

Now, to bend over backwards to be fair, interview responses will depend, at least in part, on what the journalist concerned chooses to ask. But then standard media training advice is to answer the question you wish they’d ask, not (necessarily or only just) the one they did. An interview with a powerful decisionmaker is a platform for the decisionmaker.

The Conway interview appears somewhat meandering and not very focused. I wanted to touch on three sets of comments in it.

First, asked about the transition after Adrian Orr’s sudden (and unexplained) departure, he says it is business as usual and it has been “a very smooth transition”.

“I think this institution is bigger than even Adrian Orr [it was certainly bigger – much bigger – as a result of Adrian Orr]……There’s a real sense of the ‘show must go on’ and it really has. We miss Adrian. It is a bit less fun around the place, less jokes going on – probably more appropriate jokes”, he smiles again.

So in addition to Orr being a bully, an empire builder, and someone well known for freezing out challenge and dissent, he also created an uncomfortable and inappropriate working environment? Or at least that is what Conway appears to be saying about the man who recruited him.

But you also wonder about just how straight Conway is being (and why the journalist didn’t ask more). After all, the Bank itself tells us there are big changes afoot (presumably consequent on the new Funding Agreement, prospect and actual). In the just over two months since Orr resigned, the top tier of management has been brutally slimmed down (credit to Hawkesby). At the start of March there was the Governor and an Executive Leadership Team of seven Assistant/Deputy Governors and one “Strategic Adviser”. Since then, Kate Kolich, Greg Smith, Sarah Owen, Simone Robbers and Nigel Prince have all either left already or we’ve been advised they will soon be doing so (none with an announced job to go to). Governor plus eight has been reduced to Governor plus four. And

That first group is Conway’s own level (though presumably the Bank will continue to need a chief economist). And then on down to the staff (and much of this is because Orr/Quigley massively blew the budget limit Grant Robertson had set for them and went on one last hiring spree last year). You somehow suspect that all is not exactly sweetness, light, and engagement at the Reserve Bank.

And then there was this

Conway is on record as a bigger-government sort of guy (we had his extra-curricular stuff last year, as an example) but what possessed him, interviewed as an MPC member and senior central banker, to suggest that more state interventions and bigger government might be “worth thinking about”? It simply isn’t in his bailiwick, and he shouldn’t have allowed himself to be dragged into responding to a hypothetical, especially about one outside the Bank’s responsibilities.

And finally, we got the meandering thought that “it’s possible that we get to a point where people just adjust their behaviours and ‘uncertainty’ becomes the new normal and we just get on with it. I’ve got no ’empirics’ to base that on – it’s just, I think, a very interesting thought-stream.”

Really? A “very interesting thought-stream” that people do in fact adapt to the world as it is? Startling and insightful (not).

Then, of course, there is his boss, Silk. Most serious observers regard her as fundamentally unqualified for her job, and not the sort of person who would be likely to be on an MPC anywhere else in the world, let alone as the deputy primarily responsible for monetary policy. She can be counted on to safely deliver speeches on operational topics that others have written for her, and to answer purely factual questions at MPS press conferences and FEC about what has happened to swap yields and mortgage rates. And that is about all.

She also seems to have a mindset in which rates being paid on existing mortgages are what matter rather than the rates facing marginal borrowers and purchasers. Perhaps it is what comes from a non-economics background in a bank? Thus, in the Herald interview we are told that she claimed that “the effects of the 225 basis points of OCR cuts the committee had delivered in less than a year were yet to be widely felt”. The journalist added some RB data on average actual mortgage rates which might appear to back that up. Of course, expected cash flows matter as well as actual ones – if your fixed rate mortgage is going to roll over in a couple of months onto a much lower rate that will almost certainly be affecting your comfort, confidence, and willingness to spend now. But more to the point, marginal rates for people looking at buying a property or otherwise taking on new debt have come down a long way, and were already down a long way months ago. This chart is from the Bank’s own website, showing short-term fixed mortgage rates.

As at yesterday, rates were a few basis points lower again than the end-April rates shown here. 200 basis points plus down from the peak, and that not just yesterday. And falling wholesale rates, which underpin these falls in retail rates, also affect the exchange rate, another important part of the transmission mechanism. (And, of course, with all Silk’s focus on the cash flows of existing borrowers, she never ever mentions the offsetting changes in the cash flows for existing depositors – I’m of an age to know!)

So far, so predictable (at least from Silk). But then there was this (charitably I’ll assume the word “fulsome” was not hers)

Reasonable people might differ over the inflation outlook and the required future path for the OCR, except that we were told in the MPS that there was unanimous agreement from the MPC to the forecast path for interest rates. And that is a path that is lower from here than the path published (again unanimously) in the February MPS (the deviation begins after the May MPS, not at it). In other words, not only did the February path show some further easing from (where they expected to be, and were, by) May onwards, but the May path shows even more easing from here forward.

And yet Silk talks of a “much stronger easing signal” sent in February.

Frankly, they seem all over the place. If the Committee (as it did) unanimously agrees to publish a (somewhat) steeper downward track than the one you had before then either you have an easing bias – always contingent on the data of course – or you made a mistake in adopting the track you did. And if you are comfortable with the track, it feels like a mis-step for the temporary fill-in Governor to announce that there was no bias. I guess Silk might have got stuck having to cover for her fill-in boss, but it is a pretty poor look all round. Surely (surely?) they must have rehearsed lines about biases before the press conference? Surely, if so, someone pointed out the disconnect between the proposed words and the chart above?

And finally from Silk we learn that “price stability is one of the conditions you need for growth”. It simply isn’t – and the economists on the committee are usually much more careful, with the standard central banker line being that price stability, or low and stable inflation, is the best contribution monetary policy can make (many muttering under their breath that that contribution isn’t necessarily very large). Not to labour the point but the economy was still growing, reaching its most overheated point in late 2022, when core inflation was around its worst.

All in all, not a great effort at communications from the MPC this week. As I noted in my post on Thursday, there was none of the prickly frostiness of Orr, and no sign of deliberately or conscious setting out to mislead Parliament, but it simply wasn’t a very good performance. And while Hawkesby is new to the role, chairing MPC and acting as its prime spokesperson on the day, Conway and Silk have no such excuse. Someone flippantly suggested that perhaps there is something about May and the MPC – last May was when the MPC went a bit wild talking of raising rates further (the OCR was still going to be above 5 per cent by now), and then Conway tried to blame his tools, rather than the judgements of him and his colleagues, for the associated forecasts.

If the government is at all serious about a much better, world class, Reserve Bank, they need to work with the Board to find a Governor who will lift the game and the Governor/refreshed Board will need to work with the Minister to produce a stronger MPC. It would seem unlikely that in such an improved Bank/MPC there would be a natural place for either Conway or Silk, pleasant enough people as they may be.

Reserve Bank, bank capital etc

Michael Reddell bank capital requirements, Reserve Bank

Things seem to be at a pretty low ebb in and around the Reserve Bank. There was, in particular, the mysterious, sudden, and as-yet unexplained resignation of the Governor (we’ve had four Governors since the Bank was given its operational autonomy 35 years ago, and only two have completed their terms and left in a normal way, which must be some sort of unwanted advanced country record). Having slimmed down the bloated number of Orr’s deputies by one last year, another of them quietly resigned and left last month on (apparently) short notice and no specific job to go to. Of those who remain, two are (at best) ethically challenged and one is simply unqualified for the job she holds.

And then there is the mystery as to why a temporary Governor (specifically provided for in the Act) has not yet been appointed, even though it is now four weeks since Orr tossed his toys and walked out (formally finishing on 31 March, but no longer present). I wrote about this briefly on Monday morning when it emerged (in The Post) that despite what the Minister and Bank had led us to believe on the day Orr resigned (effective 31 March), there would not be a temporary Governor in place from 1 April. The Bank’s spokesperson, quoted in the Post article on Monday so badly misread the relevant provisions of the Act that the Bank seemed to feel it necessary to issue a release yesterday, which added nothing but at least didn’t muddy the water further. The Bank’s Board has to (finally) make a recommendation of a person to serve as temporary Governor by 28 April, but even once she gets such a nomination the Minister of Finance can take as long (or short) as she likes to make an appointment (or, presumably, knock back a recommendation and send the Board away to make another).

Reasonable people would have assumed that within a few days of Orr announcing his resignation (and storming off), the Board would have met and made a recommendation. With more than three weeks notice (at least on paper) having been given there was really no excuse for not even having a recommendation on the Minister’s desk by the end of March. We are left to wonder why. Perhaps Hawkesby didn’t want the job? Perhaps the Board doesn’t have confidence in him to do even the fill-in role? Perhaps the Minister had indicated that she didn’t want him? We don’t know, and neither do international markets who (like the rest of us) were taken off-guard by Orr’s resignation. It really isn’t a good look. And if for some reason Hawkesby isn’t an option (and there are very slim pickings among the other 2nd tier managers), perhaps they could twist the arm of former Deputy Governor Grant Spencer and bring him back for a second stint filling in between Governors (only it would be legal this time)?

The unsatisfactory picture was compounded just a little later on Monday morning when Hawkesby and the Board chair Neil Quigley fronted up to the Finance and Expenditure Committee to announce that they were after all going to have a review of bank capital requirements (their opening statements are here). This had all been arranged with the Minister of Finance, who put out a simultaneous statement welcoming the review, and confirmed by the Bank’s Board at a meeting last week (which the outgoing – but still in office, and thus still a Board member – Governor did not attend).

[UPDATE: Meant to mention that Hawkesby did himself no favours – if he aspires to be seen as anything other than Orr’s man – when he opened his FEC statement this way (emphasis added)

“I’d like to begin by acknowledging our Governor, Adrian Orr, who over 7 years would have attended FEC hearings more than 50 times and always been engaging.  We are looking forward to continuing that relationship.”

Orr actively misled FEC repeatedly, and the frostiness of his encounters with any questioning FEC members has been repeatedly commented on. ]

Recall that, rightly or wrongly (I think wrongly), Parliament has given policymaking powers on such matters to the Bank (and specifically to the underqualified Board). Recall too that just a few weeks ago the Minister of Finance had indicated that she was seeking advice on ways to compel the Bank to change policy. Presumably the Board – and perhaps management – reading which way the political winds were blowing simply caved and arranged Monday’s FEC appearance and announcement, rather than risk losing their powers. They were, after all, in a weak position: as far as we know the Bank’s Funding Agreement for the next five years has not yet been approved (the Minister has talked of coming cuts), there wasn’t a permanent Governor in place, and even the appointment of a temporary Governor seemed to be hanging in some sort of limbo.

It is always possible that the Bank itself (especially now minus Orr – who last year was vociferously defending current policy and, as so often, attacking any critics) thought that a review was (substantively) timely and appropriate, but it looks a lot like bowing to political pressure, at a point of particular weakness. In an independent agency. And, frankly, since I believe that big policy calls should be made by elected politicians, I’d rather the government had actually legislated to shift big-picture prudential policymaking powers back to the Minister of Finance, while retaining a vital role for a better-performing Reserve Bank to advise and to implement (essentially the model in most other areas of government policymaking).

There are also lots of questions about where to from here with the review. The suggestion from Quigley is that the review will be completed by the end of the year, but while decisions are finally a matter for the Bank’s Board, it does invite the question of what role (if any) the new permanent Governor is to have (at least if it is anyone other than Hawkesby). By law, the temporary Governor can (eventually) be appointed for six months, extendable for another three. Even if the Board gets on and advertises for a permanent Governor this month, at best it will be several months before a new Governor is on board (eg there was roughly six months between Don Brash resigning and Alan Bollard starting work). With a non-expert Board wouldn’t one normally expect the Governor to be taking the lead in formulating the advice on which the Board would finally make decisions? Or is the new person to be presented with a fait accompli?

And then of course, there are questions about the nature of the review itself. Is it purely appearance theatre (“we need to look like we are doing something”) or is it genuinely a case of an open-minded reassessment? There is talk of consulting banks before any changes are made, but what about the wider group of interested experts and commentators (many of whom submitted on the 2019 policy proposals/decisions)? And for all the talk of commissioning “international experts”, surely only the most naive would take that at face value. You choose your expert according to your interests (eg a different group if one wanted people likely mostly to reaffirm your priors than if you were genuinely opening things up). I reread yesterday my post about the “international experts” Orr had commissioned in 2019, and the rather limited (and conveniently-supportive, having been chosen for a purpose) contribution they made. Those earlier experts were barred from talking to anyone in New Zealand other than the handful the Bank approved. Will it be any different this time?

And although back in 2019 the law was such that the decisions were still those of Orr alone (the Board then had a different role), Quigley was also the Board chair then and has had Orr’s back right throughout his time in office – apparently serving the Governor’s interests more than the public’s interest. His own questionable relationship with the facts on a number of occasions has also been documented here on various occasions. Apparently Quigley presented quite well at FEC on Monday, but so what? When he isn’t under pressure – and FEC was more attuned to welcome the review than ask very searching questions – he is a smooth operator (when he is under pressure, well…..see his press conference on the afternoon Orr resigned).

My own view, back in 2019, was that even the final Orr position – which pulled back from the initial proposals – went further than was really warranted. But one of the things I’d be looking for as part of the Bank’s review this year – and as a test of seriousness and openmindedness – is a rigorous and transparent comparison of the New Zealand capital requirements (for large and for small banks) with those of other countries. The Reserve Bank made no atttempt whatever to provide those sorts of comparisons in 2018/19.

One might think of countries like Norway, Sweden, Denmark, Australia and Canada, but perhaps also advanced countries where the bulk of the banking system is made up of subsidiaries of much-larger foreign banks (for example, the Baltics). To do this properly isn’t a superficial exercise of comparing headline capital ratios. One needs to look at things like the composition of balance sheets (in a quite granular way), risk weights on individual types of exposures (standardised and IRB) and so on. One might, in principle, take the business structure of one or more New Zealand banks and actually apply the rules in other countries to see how much capital they would be required to have on those rules, relative to the rules here.

If the current Reserve Bank policy, and scheduled further increases in minimum required capital, ended up pretty much in the pack, relative to the situation in other advanced countries, it might be considered the end of the matter. There might not be anything very optimal about what those other countries have chosen to do, but the case for any revision to the New Zealand rules would be that much harder to sustain than if (for example) the full New Zealand requirements imposed much higher capital requirements on much the same sort of portfolios. There is no compelling reason to believe that the exposure to really serious adverse shocks is any greater in New Zealand than in other advanced economies, so absent a compelling argument that the rest of the world is just “too lax”, being somewhere around the median of other countries might be a reasonable benchmark for New Zealand authorities (in a world of inevitable great uncertainty). (Incidentally, there would be no point in having requirements lower than those applied by APRA, since their requirements would set a floor for the Australian banking groups as a whole – there has been too little mention of the APRA group requirements in the recent New Zealand debate).

Reviewing some old posts yesterday I also stumbled on this chart, taken from a 2019 working paper of the Basle Committee on Banking Supervision (which I wrote about here)

I don’t want to fixate on the individual numbers, but simply to reiterate the point that any wider economic gains from higher required minimum capital ratios abate quite quickly as those requirements are increased. Actual numbers that might emerge will depend heavily on things like assumed discount rates (the ones used in these studies are far below the standard discount rates for us in New Zealand public policy evaluation), and the ability (or otherwise) of high capital ratios to save us from financial crises with severe economic consequences (a point quite in contention in 2019, when I observed that the numbers used by the Bank and their supporters were grossly implausibly large).

(Finally, on this topic, it is worth remembering that capital buffers are very useful to absorb losses, but that what matters even more – including as regards real economic losses and dislocations – is the quality of bank assets, and thus bank lending standards. A bank can have pretty large capital buffers and yet can still go off the rails quite badly in a surprisingly short space of time if lending standards degrade and/or management/Boards start chasing lending opportunities which look fine and good in the heat of a boom only to prove anything but as the tide recedes. Probably the largest real economic losses don’t arise from a bank itself coming under stress, but from the gross misallocation of real economic resources that can occur all too easily when undisciplined or excessively risky lending occurs, and those costs are already baked in when the lending and associated real investment choices are made, even if they only become apparent when the shakeout happens.)

Anyway, we will see what comes of the Bank’s review. And if, as Hawkesby/Orr [previously]/Quigley claim, the Bank’s policies are basically right, whether they can make a compelling case to persuade the public, external commentators….and of course the Minister of Finance who, I guess, still has the threat of legislating up her sleeve.

Changing tack completely, today marks 10 years since I left the Reserve Bank. As I noted at the time, that move was something of a double coincidence of wants: Graeme Wheeler really wanted me out, and I really wanted out, to be around as a house husband for our kids. It was a great move and I’ve not had the slightest regret (indeed, one shudders at the thought that I might otherwise have been there when the Orr years started). Being available for the kids, and helping to enable my wife to hold down busy jobs, will always count as one of the blessings of my life (and a few weeks ago the youngest left for university).

Every so often I think about where to next. The blog has been less frequent in the last few years (including due to 2-3 years of fairly indifferent health including post-Covid, but now passed). Circumstances change and I’ve got busier. I have occasionally thought about shutting it down and doing other stuff – I had an outline on my desk when the BPNG appointment came through of a time-consuming project I’d still like to pursue. For now, various circumstances and considerations mean I’m going to try to discipline my public comment more narrowly. There has been an increasing range of things I’d like to have written about but it wasn’t possible/appropriate. For this blog that will mean primarily Reserve Bank things, fiscal policy, productivity and not much else, which was the original intended focus. (And if a capable, even excellent, Governor is appointed, consistently lifting the performance of the Bank, and its efficiency, openness and transparency, perhaps even Reserve Bank commentary will die away. There are much bigger economic policy challenges.)

Not much parliamentary scrutiny

Michael Reddell Adrian Orr, FEC, Reserve Bank

This was the post I was planning to write this morning to mark Orr’s final day. That said, if the underlying events – deliberate attempts to mislead Parliament – were Orr’s doing, the post is more about the apparent uselessness of Parliament (specifically the Finance and Expenditure Committee) in holding him and the rest of the Bank (other MPC members, Board) to account. This is just one small example.

I was brought up – 7th form and university history – on the courage of the likes of Hampden and Pym in the House of Commons, resisting over-mighty acts of the executive, but I guess these days too often too many MPs seem more focused on becoming part of the executive themselves.

A few weeks ago one Saturday afternoon I wrote a short post about a letter I’d sent to the chair of the Finance and Expenditure Committee (in that capacity), cc’ed to the senior opposition member, about what seemed a (and yet another) pretty blatant and deliberate effort by the Governor at his most recent FEC appearance to mislead (or worse) the Committee. Orr had done so with two of his senior managers, and fellow MPC members, sitting either side of him. They’d done nothing to clarify and correct what Orr had told the Committee. I suggested that perhaps the Committee could consider inviting the Bank to verify the Governor’s claim that the RBNZ had been one of the first central banks to tighten and one of the first to ease.

The letter had been sent on Friday 28 February (so while Orr was still at work, before any of us had any hint of a forthcoming resignation) and more than a week later I’d heard nothing (the chair’s auto-reply had indicated he’d respond within 3-5 working days).

(I could add here that I’m not in the habit of writing to parliamentary committees or ministers. OIA requests aside, I think I’ve written one letter to a minister in 10 years, and the odd submission on legislation had been my only contact with FEC itself. I’ve occasionally exchanged notes with, and even met, some members of FEC, but only at their initiative.)

Anyway, the post seemed to have been brought to the attention of the two MPs.

On the following Monday morning (10 March) I heard from Barbara Edmonds’ email account

And that was that.

From the committee chair, Cameron Brewer, there was a little more. He sent me an email on the Tuesday afternoon (11th). In that email he claimed that he hadn’t wanted to respond while research was underway, and implying that his office really should have sent me a holding reply.

What research? Well, it seemed that he had asked the parliamentary library staff to look into the matter. He even sent me a copy. This was first bit of it (highlighting added)

It was pretty clear that the research hadn’t been requested the previous week, but at – what seems like – very short notice indeed. So short that the poor parliamentary staff hadn’t even had time to check all the OECD central banks, even though it takes about 30 seconds to do each one. And, by their reckoning (having left out 10 of the relevant central banks), the Reserve Bank had indeed been third (of their sub-sample) to tighten (and something like sixth to ease).

Brewer passed this along, apparently content that it seemed to vindicate the Governor (and if so I guess there was no need to do anything so awkward as bother the Bank). But he did add “If this information falls short of your expectations, I’m happy to put your email formally to the committee for them to acknowledge receipt or action further.”

I went back to Brewer the following day, pointing out that parliamentary staff had simply not checked a large group of OECD central banks, drawing the distinction between euro-area and other central banks (thus there were only about 20 independent sets of monetary policy), and repeating the listing I’d referred him to in my first letter, showing that the Reserve Bank of New Zealand had been roughly middle of the pack (by date) in both tightening and easing. I noted that the parliamentary research had not identified any mistakes or errors in my listing, and so it wasn’t clear how – incomplete and all – it shed any useful light.

(Note that the issue has never about macroeconomic significance – there is none in the rank ordering, when every country faces its own unique set of macro circumstances and inflation risks/threats – but about a senior public official appearing to deliberately mislead Parliament, aided and abetted (by their silence) by senior colleagues, all with no apparent consequences.)

As to where to next, I was a little torn. It was pretty clear that Brewer wanted the issue to go away, and of course Orr had announced his resignation (while still being in office until today) between me writing the letter and him responding. So, assuming it would be the last I heard, I ended my email back to him pretty emolliently.

“Quite how you choose to pursue (or not) this matter is of course over to you.  Given that parliamentary committees routinely ask follow up question of government agencies that appear before them, my suggestion had been that at least you ask the Bank for the evidence and/or argumentation to back the claims made by the Governor.”

But, there was more to come. I got this reply.

“Thanks Michael. Good points. Let me put it back to them. Appreciate your comprehensive work in this area. I honestly did not know our international rankings on monetary tightening and loosening during that period, hence expressed no opinion and appreciate your response (as I sought unvarnished from you in my last email) to the Parliamentary Library’s paper.”

It was a bit odd, since my concern wasn’t with the Parliamentary Library staff, but with the Reserve Bank (the senior public officials who had actually misled FEC).

I went back to Brewer thus

“In some respects the specifics of my original email to you (28 Feb) has been overtaken by events (Orr’s unexpected early resignation), and obviously it is up to you and the committee whether you want to pursue it any further (given that other RB managers sat silently by).  That said, in some respects the thing I’d urge you to think about more is how under the (soon to be appointed) temporary Governor and then a new permanent Governor you will hold the Bank to account and ensure you are consistently being given straight answers.    Ideally, of course, the character of the new appointees will be such that no further serious issues of this sort arise.”

Anyway, they must have given the Parliamentary Library staff a bit more time this time as I heard nothing more until last week.

In the meantime, as I’ve previously highlighted on Twitter, a reader had drawn my attention to a new OECD report which (p 32) actually addressed the timing matter directly (at least as far as easings) in a summary table

Contrary to what the Governor had told Parliament, the RBNZ was (of course) not among the first to ease.

Last week, I heard back from Brewer’s EA. 

….we have compiled a more extensive report, noting your concerns. Again, I strongly emphasize that this comes from Cameron in his personal, and induvial [sic] capacity as an MP. Formal matters would need to be raised with the committee itself.

We will leave the findings to your expertise, and hope you find it helpful. We will leave this with you.

Many thanks for taking the time to write.

I was rolling my eyes at this point. Did writing to the committee chair, explicitly in that capacity, cc’ed to the senior Labour member of the committee, somehow not count as “raising it with the Committee itself”? And “we will leave the findings to my expertise”, when the issue was never the data – which anyone could track down with an hour’s quick internet searches – but whether MPs were bothered about being lied to. They apparently weren’t.

But Brewer’s EA did send me the Parliamentary Library’s new piece…..which told me exactly what I already knew, and had raised with FEC, that the Reserve Bank was not among the first to tighten or the first to ease. In fact, here is their table.

The Parliamentary Library (now) know that Orr was simply making stuff up. So does the OECD. So, in fact, does anyone who even bothered to check. So, it seems, now does the chair of FEC. But he and his members simply don’t seem at all bothered. And that, it seems, is Parliament for you.

I was overseas last week and was recounting this experience to a colleague over dinner. He was, understandably, a bit flabbergasted. After all, he noted, surely Orr’s initial claims were just factual and easily verified (or otherwise)? Well, indeed. And why would a parliamentary committee not be bothered about having been lied to? Well, there I couldn’t really help him. I explained that the timing of the resignation perhaps eased any pressure they might otherwise have felt, but it didn’t seem even close to a decent explanation, since (as I had noted to the – new – FEC chair) this was only the last in a long series of Orrian efforts to mislead the committee, his senior colleagues had sat by silently (again) while he did it, and if we are looking (as the law says we must) to the Bank’s Board to lead the selection of a new Governor, surely asking them questions about their past Governor’s egregious behaviour might have shed some useful light.

But instead we live in the age of Donald Trump, Pete Hegseth, and Karoline Leavitt where truth and straightforwardness in public officials seems at best an optional extra…..even, it seems, in New Zealand.

(And, to be clear, had Brewer come back to me the day Orr announced his resignation and said something like “thanks for raising those concerns, which do seem a little troubling, but since the Governor has now resigned there probably isn’t much mileage in us pursuing this specific any further”, I’d probably have gone “fair enough, that’s life” and moved on.)

UPDATE: Cameron Brewer, the chair of FEC, has commented below in response to this post. Readers are encouraged to read his comments. On specifics, I will have to take his word on when the first lot of information was requested from the Parliamentary Library, but assuming that is so it leaves a number of questions, including why Brewer or his EA didn’t go back to the Library staff straight away and ask them to check the rest of the central banks (might have taken them another 20 minutes). Or, indeed, ask the Reserve Bank to verify the Governor’s claim (given that this initial request for information was before Orr’s unexpected resignation).

On the way ahead

Michael Reddell Governance, Reserve Bank, Reserve Bank Board

In my post last Thursday I offered some thoughts on changes that should be initiated by the government in the wake of the Governor’s surprise resignation. (Days on we still have no real explanation as to why he just resigned with no notice, disappearing out the door and (eg) leaving his international conference in the lurch, but this post is entirely forward looking.) Here I want to elaborate on three points, having benefited from a few days to reflect and a few useful conversations/exchanges:

  • the position of the Board chair, Neil Quigley,
  • policymaking on bank (and related) regulatory matters,
  • the Funding Agreement.

Board members, including the chair, of the Reserve Bank cannot be removed at will by the government. That puts them in a different position than the boards of many other government agencies. Whatever the pros and cons of that model (and there are both) it is the law as it stands.

Last year the government – for reasons never made clear – extended the term of the chair of the Board, Neil Quigley, for another and apparently final two year term. Quigley has been on the board for a very long time now, and has been chair since 2016. By usual standards of corporate governance that would really be too long anyway, even allowing for the fact that the role has changed over time. But it was pretty clear when the reappointment was done last year that with Quigley getting another two years but Orr having (then) almost four years to run, the government expected – and appropriately so – that a new chair would be in place to lead the search for, and transition to, a new Governor (Governors are now limited to two terms).

It should be untenable for Quigley lead the search (and transition) process now. He drove the selection and appointment (and reappointment) process for Orr in the first place. And frankly, however Orr appeared to the interviewers in 2017, that did not turn out well, and did not end well. The Board – and especially the long-serving Board chair – has to take some responsibility for that (including the chaos of last week, including Quigley’s own unconvincing belated press conference, which one person put it to me was bad enough to warrant dismissal for cause – sadly, not really a statutory option). In addition, Quigley – whose responsibilities have been to the public and the minister – has had the back of the Governor throughout his term, and there has never been the slightest hint in any Board Annual Report of any concerns at all. Worse, it appears that Quigley championed that blackball back in 2018 which – unlike any serious central bank in the world – saw anyone with current or future research interests in or around monetary policy banned from consideration for appointment to the Monetary Policy Committee (and yes, there is chapter and verse on this). Much more recently, whether deliberately or through careless forgetfulness (and failing to check records) he actively misled Treasury and, in turn, the public on this matter, claiming there’d never been such a ban (see, eg, here and here).

It is time for Quigley to go, and for cleaning house to begin in earnest. Quigley can’t be dismissed, but it shouldn’t be beyond the wit of the Minister of Finance to have it made clear to him that it isn’t tenable or appropriate for him to lead the next stage. Quigley himself is a wily political operator and could no doubt read tea leaves were they presented to him. And he seems still to want that medical school. Willis also has an existing board vacancy to fill now, and 2 more positions become vacant on 30 June.

(Assuming she isn’t willing to amend the Act to make the appointment of the Governor wholly a choice for her and the Cabinet), Willis should be looking to move in short order to put in place a new Board chair, someone not compromised by the Orr years, someone of stature (appointments need to be consulted with other parties in Parliament), but also someone trusted to be sympathetic to the general direction the government wants to go with the Bank. (If that seems threatening or politicised, it isn’t intended that way, but we are a democracy and governments, in Parliament, get to make the big picture policy and organisational directional calls). In any case, the Minister should look to issue a new letter of expectations to the Board making clear what she is looking for as regard budget discipline, policy priorities, and the qualities to be sought in a new Governor.

What about prudential regulatory policy? In most areas of government, policy is set by ministers, and implementation is done by agencies, including Crown entities, operating (implementing/applying) at arms-length from ministers. That is both efficient (ministers have limited time etc) and consistent with good governance generally – we really do not want ministers playing favourites for their donors or mates in the application of the standard rules, and we really do want accountability to Parliament and public for policy choices.

In prudential policy in New Zealand things are different. For the most part, the Reserve Bank itself gets to set the rules (big picture social risk tolerances and all) and apply them. Prudential regulators of course tend to like such a model, and there is plenty of literature from sympathetic former regulators, and from academics, in support of it. On the other hand, it looks pretty dubious through a democratic accountability lens. I’ve written here previously about former Bank of England Deputy Governor Paul Tucker’s book on delegating power, including but not exclusively so, to central banks. Bank regulatory policy simply does not pass the test – the various sensible principles Tucker lists – for being delegated to technical experts. And, as it happens, in New Zealand the power doesn’t even rest with technical experts, but with the Reserve Bank Board, which has been very light indeed on expertise or experience in these areas.

It has become clear that the government is unhappy with elements of Reserve Bank policy choices in these areas. Some of the apparent discontent – eg last year and the secretive advice re remuneration of settlement account balances – doesn’t make sense. Some other counts seem weak, and others rather more persuasive. But here’s the thing: the government is the government and, hand in hand with Parliament, is supposed to make our laws, and be accountable for them. The government, for example, sets the inflation target (while delegating OCR calls needed to deliver inflation near target).

It seems highly likely that prudential policy issues are going to be front of mind in choosing a new Governor (all that ongoing select committee inquiry and all). Which is fine, but a much more direct way to do things would be to seek a simple amendment to the Deposit Takers Act to make clear that in setting prudential standards the Reserve Bank first needs the consent of the Minister of Finance (at present, the Bank needs to inform her – not consult – and even failure to inform doesn’t invalidate the new rule). Then the government could be confident that whoever became Governor would be (a) providing advice, and b) ensuring the implementation of the rules, but that policy itself would be being set by the government. People we can toss out. We shouldn’t want a yes-man (or woman) as Governor – it shouldn’t be in the Minister’s interests either – and it is critically important that the Minister gets robust, technically expert, advice from the Bank (informed by research and critically-reviewed analysis) before making prudential policy decisions. But big picture policy calls should be for the Minister.

I’m not a parliamentary process expert so perhaps it might take a few months to make such an amendment. It is likely to take a few months to appoint a new Governor anyway, but any appointment could then be made with the new Governor knowing that those would be the terms on which they were taking the job.

The final of my three points is about the Funding Agreement, widely believed to be one of the factors that led Orr to storm off. As a reminder, the Reserve Bank isn’t (but probably should be) funded by annual parliamentary appropriation (yes, we want operating autonomy but we still fund the Police that way), but through an agreement that determines how much of its profit the Bank gets to keep and spend. This is a deeply flawed model – a legacy of late eighties disputes. Not only does Parliament not get a say at all (with hundreds of millions of operating spending involved) but the Bank does (government departments simply get told by ministers what their appropriation will be). But worse it is not compulsory for there even to be a Funding Agreement, and the law states that if there isn’t one the board simply has to use its best endeavours to keep spending no more than in the last year of the previous agreement. Which, I suppose, caps further growth in bloat and budget, but could be used to simply to refuse to accept a cut in budgets (when almost every other government agency has had or faces cuts). I’m not suggesting the Bank would negotiate in bad faith, but….the law is the law, and it gives them much more power and formal leverage than most agencies have. It should be changed, and in short order, to ensure that if the five year funding model remains, a) the Minister sets the amount, and the allocation among Bank’s statutory functions, and b) that all is subject to parliamentary debate and ratification as other government spending is.

Changing tack, who might eventually be chosen as the new Governor? There isn’t any obvious standout candidate – which may be a poor reflection on how our system has worked, including the way successive Reserve Bank Boards have operated over the last couple of decades. Various articles have listed a reasonably predictable list of possible names, including Arthur Grimes, John McDermott, Christian Hawkesby, and Prasanna Gai [UPDATE: and Dominick Stephens was also on those lists]. I tossed into the mix on Twitter the other day the name of former Government Statistician and (more recently) Deputy Governor, Geoff Bascand. One name I have been a bit surprised not to have seen mentioned – casting the net necessarily wide – is Carl Hansen, who was appointed to the MPC last year, but who has both Reserve Bank and Treasury experience, and chief executive experience.

All those people are economists by background. Neither the current head of the Fed nor the current head of the ECB is an economist. That is pretty uncommon these days, but both the Fed and ECB have deep benches of economics expertise in very senior roles. But might, for example, there be a case for a strong non technically expert change manager becoming Governor, perhaps with the intention of doing only 2-3 years (on the pattern of Brian Roche at PSC)? I’d be wary – perhaps a good Board chair could best do some of that – but….there is no standout candidate.

An obvious question is what about New Zealanders abroad or indeed foreigners (eg the Australian government has appointed a Brit, with no past ties to or experience of Australia, to the Deputy Governor role at the RBA). I used to be pretty staunchly opposed to a foreign appointment when the Governor was the all-powerful single decisionmaker, but legislative reforms have – at least on paper – spread the power. Someone with no past ties to, or experience of, New Zealand would still face a big adjustment hurdle, and it would be quite risky (and there are adverse selection issues: the most able globally might reasonably think their best opportunities were not in New Zealand). New Zealanders abroad might be more of an option, although one I used to champion as warranting serious consideration (including in 2017) – David Archer, former Assistant Governor, former senior official at the BIS – might have almost aged out by now (although is probably only about the same age as Grimes) and has been away for a long time. There will be others.

I’m not going offer my thoughts on the pros and cons of any of these individuals. Suffice to repeat that, and especially given the broad role as it is currently specified, there doesn’t seem to be a compelling candidate in any of the lists. Perhaps even more than usually, in coming up with their final pick, the Board and the Minister might want to be thinking in terms of a team at the top, the sort of people a possible new Governor would choose to fill the couple of most senior posts (policy and operational/administrative) around him/her.

$11 billion and out

Michael Reddell Adrian Orr, Reserve Bank

I’d been thinking last week of writing a post looking ahead to the end of Adrian Orr’s term (due to have run until March 2028) and offering some thoughts on structural changes the government should be looking to make, to complete and refine the Reserve Bank reform programme kicked off by the previous government in 2018. Some of that is now overwhelmed by events, but the importance of the issues – and the medium-term opportunities to deliver a better central bank – hasn’t. So although I will offer a few thoughts at the end of this post on yesterday’s shock news, and the unsatisfactory handling of it, and perhaps even fewer on Orr’s overall tenure, first I’m going to focus on the future.

The Reserve Bank of New Zealand is one of the relatively few central banks in the world where the government is not free, when a vacancy arises, to appoint a person they have confidence in as Governor. One can mount a reasonable – although not entirely compelling – case that it should be very hard to dismiss a Governor (or perhaps even an MPC member), and it typically is. But the governorship of the central bank is a very major and influential role – affecting, when mistakes are made, all of us adversely, including perhaps the government’s own electoral fortunes. Against that backdrop our system is extraordinary: the government can only appoint as Governor someone nominated by the board of the Reserve Bank, a board which (a) has no electoral mandate or accountability, b) at least in the New Zealand experience will often have little or no subject expertise, and c) may well have been (this time is, but it was also so when Orr was first appointed) largely appointed by the government’s predecessors, reflecting their particular whims and patronage priorities. Nicola Willis – or Grant Robertson – might not be any sort of macroeconomist, but they are (were) accountable to the voters. Neil Quigley, Rodger Findlay, Jeremy Banks [oops, meant Byron Pepper] (all of whom have had questions raised about them) and the rest have neither expertise nor accountability.

Now, it is true that the Minister of Finance can reject a board nomination, but she cannot impose her own candidate. In reality the government can send messages to the board about what they don’t want (Helen Clark was apparently pretty clear she didn’t want to be served up with the name of a Brash clone – anyone who’d been part of the Brash RB), but those views carry no formal legal weight, and a Board could simply assert itself and insist on serving up only names it preferred. The government doesn’t get any say in what sort of person is nominated – no say, for example, in the job description or personal qualities sort. It is a stark contrast to the position re heads of government departments – who usually have no significant policy decision-making power – where the government can specify what they are looking for and can in the end simply appoint their own person. The same goes for members of the MPC – supposedly really powerful positions and yet the Minister can only appoint people the underqualified board (which has no routine responsibility for monetary policy, and thus no expertise) serves up. And here it is important to remember that the Reserve Bank isn’t just the monetary policy maker, but has key policymaking roles in a wide range of banking and financial regulation, stuff for which ministers are usually responsible. These legislative provisions should be changed, so that the Minister/Cabinet can appoint their own person – stick in some boilerplate expertise criteria, and perhaps offer the Board the chance to make suggestions, allow the FEC a scrutiny hearing before the person took up the job – and be accountable for that appointment. It would be an entirely normal model internationally.

The issue at present is compounded by the fact that the names to be recommended as the new Governor will come forward from the same Board (largely) that recommended Orr’s reappointment in 2022 (and with the same Board chair as was responsible for the initial appointment in 2017). No one outside government knows what possessed Nicola Willis to reappoint Quigley – who has a terrible record of his own, in blocking expertise when the MPC was first set up, openly misrepresenting the history later, and in covering for Orr almost throughout – but he is about the last person who should be playing a decisive role in choosing a successor. A minister who really cared about the future of the institution and its policies etc would insist that Quigley left now too, appointing a new chair to lead the search to replace Orr.

My next suggestion is that policymaking powers around banking (and insurance etc) prudential regulation should be removed from the Reserve Bank itself and handed back to the Minister of Finance. There is a decent case for having OCR setting being done by an independent body, and a fairly compelling one for having the application of prudential policy and oversight to particular institutions be done by an independent body. But even in respect of monetary policy, the inflation target is now set unambiguously by the Minister of Finance alone (previously used to be an agreement with the Governor), and pretty all other important policymaking regulatory power in our system of government rests with ministers – the people we can throw out. There is a lot of controversy around at present about aspects of the Bank’s prudential policy choices. I agree strongly with some of them, disagree with others, and generally am not convinced that the specifics matter quite as much as some of the critics claim (and I think on that I may be closer to Orr). But the people who should be making these policy calls are ministers. We elect them. We toss them out. Of course, they need expert advisers – so this isn’t a call to diminish Reserve Bank capability (in fact it probably needs strengthening – check how few research papers (0) they’ve published in the last decade on regulatory policy and financial stability matters), but to have a clearer stronger separation between policymaking and implementation (and, given the inflation target, what the MPC does is – influential – implementation).

I’ve also noted here before that there is a decent case for a structural separation of the Reserve Bank. When the Bank was first made independent it was basically a monetary policy agency with a few vestigial regulatory/supervisory staff. These days (even amid the general bloat) far more of the staff are on the regulatory side, and there are two significantly different (expertise and culture) prime roles. Even the sort of expertise one might need/want in a chief executive should be materially different: monetary policy is primarily a macroeconomic role, with some operational responsibility (markets, currency etc), while the supervisory side is a regulatory function pure and simple. Splitting out the regulatory functions into a New Zealand Prudential Regulatory Agency would parallel the Australian model; a system which has substantive matters, but also where alignment makes some sense when the biggest systemic risks etc here relate to Australian-owned banks. (If multiplication of government agencies was a concern, the FMA could be wound into a single financial regulatory body.)

Those changes can’t generally be made overnight (they all require legislation), but as a direction they have a lot to commend them, and I’d urge the Minister of Finance to take time in the next few weeks to reflect on the sort of direction she wants, before the momentum of the existing model takes hold. It is a busy time for her – the Budget will be more pressing – but medium-term choices matter too and this is her opportunity to stamp her mark on a better set of central banking arrangements.

One thing that doesn’t take legislation would be an overhaul of the Monetary Policy Committee’s charter, and particularly the culture around it. Setting up a Monetary Policy Committee was a good call by Grant Robertson – by the time it was done everyone agreed we needed to move away from the single decisionmaker model – but the specific path chosen was a fairly unproductive dead end. We had externals (three at a time) appointed – in one case solely (as OIA papers reveal) for her sex rather than expertise in the field – and then we never heard from them or saw any evidence that they made even a modicum of difference, even as they collected their not-inconsiderable fee and rounded out their CVs. This government has taken some steps to improve the quality of the externals – although they also extended again the term of an 80 year old member who was there through the worst of the costly policy mistakes on 2020 to 2022 – but there is still no sign of them making any difference in style or substance, and not the slightest accountability for their views. Much better to have a much more open system – as in the UK, US, or Sweden for example – where MPC members are open about, and accountable for, their views. Historically the Bank’s management – even before Orr- hated the idea, but in the real world everyone knows there is huge uncertainty and that processes are likely to benefit from open exploration of ideas, contest of views, and actual accountability. The Supreme Court manages to have dissenting opinions published. There is no reason why our MPC should not. And require members to front up to FEC from time to time, including in (non-binding) hearings before these powerful individuals take up their appointments. Good monetary policy is not an infallible text handed from heaven but, inevitably and appropriately, a process of discovery and challenge, in which everyone – or at least MPC members who are up to the job – would benefit from greater openness.

What of yesterday?

It is all highly unsatisfactory. We had brief press releases from the Bank and from the Minister but no real answers. We are told there were no active conduct concerns – although there probably should have been, when deliberately misleading Parliament has happened time and again, and just recently – and yet the Governor just disappeared with no notice on the eve of the big research conference, to mark 35 years of inflation targeting that he was talking up only a week or two ago, (I also know that one major media outlet had an in-depth interview with Orr scheduled for Friday – they’d asked for some suggestions for questions). And with not a word of explanation. If you simply think your job is done and it is time to move on, the typical – and responsible – way is to give several months of notice, enabling a smooth search for a replacement. He could easily have announced something next week, after the conference, and left after the next Monetary Policy Statement in May.

Instead, it is pretty clear that there has been some sort of “throw your toys out of the cot and storm off” sort of event, which (further) diminishes his standing and that of the Bank (but particularly the Board and its chair). It all must have happened so quickly that we now have this fiction that Orr is on leave for the rest of the month (the provisions in the Act require a temporary Governor to be appointed by the Minister only on the recommendation of the Board, and probably Orr just didn’t leave them time). After several hours of uncertainty, the Board chair finally decided to hold a press conference, which he didn’t seem to handle particularly well and (I’m told – I only have a transcript – in the end he too stormed off) we still aren’t much the wiser. It will, I suppose, provide much topic for conversation among the research geeks at the conference today and tomorrow (quite what visitors Ben Bernanke and Catherine Mann – BoE MPC member – will make of it all is anyone’s guess).

I guess it is probably true that Orr can’t be forced to explain himself, although since he is still a public employee until 31 March I’m not sure why considerable pressure could not be applied. But even if he won’t talk the answers so far from either Willis or Quigley really aren’t adequate. You don’t just storm off from an $800000 a year job you’ve held for seven years, having made many evident policy mistakes and misjudgments, as well as operating with a style that lacked gravitas or decorum etc, with not a word. Or decent and honourable people, fit to hold high public office don’t.

The suggestion seems to be that budgetary pressures – the Minister wanting to cut the Bank’s next five-year funding agreement are at the heart of it (and a careful read of the Reserve Bank statement hints at that). I had heard a story – apparently well-sourced – that the Bank had actually been bidding for a material increase in its funding, on top of the extraordinary increases of the last five years, but whether that is true or not the Minister does seem to have signalled coming cuts, and Orr has long been known more for his empire-building capabilities than for his focus on lean and efficient use of public money, But every public sector chief executive in Wellington has had to deal with budgetary restraint and, so far as we can tell, not one of them has tossed his/her toys and stormed off. It isn’t as if the Bank had been relentlessly and exclusively focused on its core business, with not a penny to be spared the poor taxpayer. In any case, from what comments have been let out it seems that final future budget decisions had not even been made yet, so surely it can’t be the whole story.

Comments by Quigley suggests that perhaps Orr was getting to the end of his tether, and some one or more recent things made him snap, reacting perhaps more than a normal person would do faced with the ups and downs of public sector life. It seems highly likely the budget stuff, and the desire to keep pursuing whims, was part of it, but it can hardly have been all. I don’t suppose he felt any great compunction about misleading Parliament so egregiously again…..but he should. And all this time – having stormed off with no adequate explanation – Quigley declares that he still had confidence in Orr. Surely yesterday confirms again that both of them, in their different ways, were unfit for office.

Oh, and for those puzzled by it, the title of this post refers to the latest estimate of the losses to the taxpayer from the Bank’s rash punting in the government bond market in 2020 and 2021. $11 billion dollar in losses. Three and a bit Dunedin hospitals or several frigates or…..all options lost to us from this recklessness, undertaken to no useful end, and a loss which Orr endlessly tried to play down (suggesting it was all to our benefit after all), and which not one of his MPC members – one now temporarily acting as Governor – even either dissented on or gave straight and honest contrite answers about. It has been 43 years since a Reserve Bank Governor was appointed from within. That is an indictment on the way the place has been run. Successful organisations tend to promote from within. Orr (and Quigley) do not leave a successful organisation, but one of yes-men and women. The place needs a fresh broom to sweep clean. One hopes the government cares enough to ensure it happens,

The MPC returns from its summer holiday

Michael Reddell Monetary policy, Reserve Bank

It is almost never an (unconditionally) good thing if an official policy interest rate (in our case the OCR) is being adjusted in large bites, whether that is (for example) 175 basis points of cuts in the last six months or 375 basis points of increases in just twelve months a couple of years back. One can think of rather hypothetical exceptions: a civil war ends and the reckless central bankers who financed it are suddenly sent on their way (so actual and neutral rates fall a lot), or a bold reforming government takes office with an immediate policy programme likely to dramatically lift potential growth, and involving lots of new investment (pressure on resources) in the transition (so actual and neutral rates rise a lot). But that isn’t the story of New Zealand in the last few years (or any of our advanced country peers). Really big changes in official interest rates are usually a reflection of bad stuff having happened: that might be a really nasty external shock (as in late 2008) or past mistakes by the central bankers responsible.

But of course you get no hint of this from the Governor speaking for the MPC. The general gist I’ve seen in headlines reporting his comments in the last 24 hours is to talk things up. Rather than watch the Governor’s FEC appearance I went for a walk this morning, but as I was walking I happened to note this

It might be necessary at this point (almost certainly was) but it isn’t an unconditionally good thing, and it would be good if he (and the political cheerleaders trying to muscle in and claim credit – Luxon, Willis, Seymour) showed even some sign of recognising it. But I guess contrition is a bygone word. (Opposition political parties tend to use the point – big cuts generally mean something bad happened – only to switch rhetoric when they in turn hold office.)

In truth, the Reserve Bank and its MPC really does not know what it is doing. Their own successive forecasts show it. In this chart I’ve taken their projections for the OCR in the June quarter of 2025 for each of the last five MPSs. Only 9 months ago they thought the OCR in the June quarter would average more than 200 basis points higher than they now think.

That might be pardonable if some really big external shock had hit the New Zealand economy. But there hasn’t been any such shock. Commodity prices haven’t plummeted, fiscal policy hasn’t suddenly tightened, no financial crisis has broken upon us

The MPC’s output gap estimates for around now have bobbled around a little, but haven’t really changed a lot (and recall that monetary policy works with a lag, so for example the December data – the GDP input for which we finally get next month – won’t have been materially affected by OCR cuts late last year).

The MPC might respond – if they ever engaged – that perhaps they haven’t usually been much worse than the typical market forecaster. But we – citizens – don’t employ those forecasters, while we delegate a great deal of power and prestige to this supposedly expert committee.

They might also argue that they are doing their best. No doubt, but their best isn’t very good. And what that means is that we are still in a phase – as we have been for the last five years – where neither we nor they can have any confidence whatever in their numbers or statements about what comes next or where the OCR might be at, say, the end of the year. After all, that is 10 months away, and 10 months ago they thought the OCR now would be 5.6 per cent. They simply do not have a good understanding of the inflation process – a big part of the job they are charged with doing. Perhaps we’ll still be at 3.75 per cent, or perhaps we’ll be at 2 per cent: neither seems that implausible, given how inadequate the understanding of the inflation process has been, even without really big external shocks.

Which brings me to some more mundane observations and puzzles around the numbers they did produce in yesterday’s statement.

The big one relates to the fact that, on the Bank’s own telling, the OCR is above its best estimate of neutral now and never drops below neutral (the Bank’s current estimate is 2.9 per cent, while the OCR doesn’t drop below 3.1 per cent). And the current (negative) output gap is estimated (by the Bank) to be about 1.5 per cent of GDP (and the unemployment rate, picked to peak about now at 5.2 per cent, is also well above the Bank’s estimate of a NAIRU). And yet, as if by magic – because there is no visible explanation – quarterly GDP growth is expected to bounce back almost immediately to well above potential, and the unemployment and output gaps close over the next couple of years. But how (on the Bank’s numbers)? When one gets into an economic slump (material negative output gaps), it is normal for policy rates to undershoot neutral for a while to provide the impetus to get the economy back on course (and avoid inflation undershooting). The current slump (negative output gap) isn’t as deep as in, say, 2009, but it isn’t nothing either.

But then there is the other puzzle. Why isn’t inflation falling further (on the Bank’s numbers)? The Bank doesn’t help people trying to make sense of their inflation projections because (a) they don’t publish projections for core inflation (quite a major gap now), and b) they don’t publish their inflation projections in seasonally adjusted terms. But when the output gap is forecast to be negative for the next couple of years (and materially so this year), surely we should be expecting to see inflation fall further. But it doesn’t seem to.

Non-tradables is not core inflation, but it is the best they provide (bearing in mind that non-tradables historically averages well above headline, and so isn’t expected to settle anywhere near 2 per cent per annum). Their non-tradables forecasts for 2025 are already as low as they are ever thought likely to get.

I can do same sort of chart for their LCI wage inflation forecasts. The trough is already reached in the June quarter this year (just a few weeks away) with the unemployment rate still above 5 per cent.

It doesn’t seem to hang together very well as a story.

There aren’t many interesting charts in the MPS itself, but this one caught my eye.

It is based on a working paper that hasn’t yet been published (less than ideal) but seems to show that the bits of non-tradables inflation that are most responsive to monetary policy pressure have already fallen too or below the rates of inflation experience during the pre-Covid decade, where core inflation quite materially undershot the midpoint of the target range, that the MPC is required to focus on. It isn’t an ideal chart, including because it doesn’t show the earlier period when core inflation got beyond the top of the target range, but – given that the latest (Dec) outcomes will have been driven by the OCR at 5.5 per cent, and that (as above) the OCR never gets below neutral, you’d have to think it likely to more disinflation was already in the works, including with the OCR now at 3.75 per cent.

Perhaps there are good answers, but if so (a) they aren’t in the MPS, and b) the MPC members never give speeches or serious searching interviews.

I have noticed that the Bank has consistently been forecasting a large rise in the terms of trade – for reasons that elude me – and perhaps that is some part of a story, but surely any effects of even that puzzling projected rise are already included in those (disinflationary) output gap, unemployment gap, and OCR gap numbers?

Two final thoughts.

When the MPC was established six years ago, the hope – and perhaps promise – was that we would have better quality decision-making and more transparency and accountability. Sadly, any such suggestions have quickly turned to dust, whether under Grant Robertson as Minister of Finance or, more recently, Nicola Willis. The quality of the external members has improved a little over the last year, with two new appointments by this government, although one elderly retired academic who served on the committee from the start (through all the costly mistakes of 2020 to 2022) has recently been extended again by the Minister of Finance. But we hear nothing from any of these people, whether in speeches, interviews, testimony to Parliament’s FEC. Or the minutes of the MPC meetings (the Summary Record of Meeting, which takes up the first three pages of the MPS). These documents have become utterly pedestrian and largely repetitive of material elsewhere in the document. And perhaps more to the point, there is rarely if ever any sense of divergences of view or serious explorations of alternatives, this around subject matter where (see above) the consensus view has so often been so wrong in recent years. Here is the final page of yesterday’s Summary Record of Meeting, where there is just nothing suggested any sort of range of views.

One hears on the grapevine suggestions that the MPC does in fact sometimes have robust debates. Perhaps, but they give no hint of this – in a field that everyone knows is characterised by huge uncertainty, and where challenge and contest of ideas and evidence is vital – and there is no serious accountability. One can only hope that one day, perhaps looking to the end of the Governor’s final term (in March 2028) the Minister of Finance might seek some advice from The Treasury on how to finish the work that Grant Robertson began, but let run off the rails. Some of these people might be uncomfortable about having to front up with their views and analysis, or having to account for their judgements, but – academic or otherwise – if that is so they simply aren’t the right people for such powerful policymaking positions.

And finally, someone reminded me yesterday that the Reserve Bank is holding a closed-door conference in a couple of weeks to mark 35 years since the Reserve Bank Act of 1989 came into effect, and inflation targeting in New Zealand – pioneering as it was – took formal legal effect. They look to have a couple of good keynote speakers (Ben Bernanke, and Bank of England MPC member Catherine Mann – whose BOE speeches are always worth reading, even if her contribution (in a former role) to debate on New Zealand productivity and immigration a few years ago was spectacularly bad). I’m sure the select invitees will enjoy a good time and some expensive hospitality.

The Reserve Bank says that the aim is as follows

One hopes then this will include serious and self-critical reflections on how the last few years came to happen. The promise of inflation targeting was that serious outbreaks of core inflation – and aassociated real unexpected redistributions of wealth, and nasty adjustments to get things back under control – simply would not happen again. And yet they have. Much of the promise in the New Zealand context was that in exchange for delegating huge power to the Reserve Bank, we’d see serious accountability when mistakes were made – and yet, as far as I can see, no central banker anywhere has paid a price for the mistakes of recent years. Or perhaps they may reflect on the not-so-small matter of the massive financial losses central bankers here and abroad ran up on the taxpayers’ bill over the last few years. But – based on the approach of our own Governor, MPC and ministers in recent years – probably not. I’m certainly still in the camp that sees inflation targeting as better than the alternatives – at the 25th anniversary conference I offered some thoughts on why nominal GDP targeting didn’t seem a better choice for New Zealand, in 1989 or more recently – but I’m much less convinced than I was decades ago that delegating the power to central bank Governors or MPCs makes sense. We need expert advisers, but accountability for central bankers has proved so elusive we might be better off putting the decisionmaking back with the people we can toss out, the politicians.

PS: I also saw this comment, presumably from the Governor’s FEC appearance. If this means an end to the long summer holidays and a return to eight meetings a year then it would be most welcome.