National’s and ACT’s attacks on the Reserve Bank and its Governor are becoming more frequent and strident. As the cost-of-living crisis bites deeper, and the Reserve Bank tightens the screws on interest rates, pushing up home mortgage rates, it becomes easy to portray the Reserve Bank and its Governor as the problem. 

Add in the fact that Adrian Orr does not fit the traditional mould of a central banker, with his irreverent flamboyance and brusque manner (a Doc Martin of the monetary policy world, if you like) and he and the Reserve Bank can quickly be portrayed as cavalier, financial technocrats playing havoc with, and caring little about, small to medium businesses and households struggling to get by at present. 

With recent announcements of enormous trading bank profits, which have aroused the ire but not any action from the Prime Minister, a wider picture can be painted of the financial sector, aided, and abetted by an unpredictable Reserve Bank acting consistently against the interests of increasingly hard-hit average New Zealanders. 

But no matter how attractive this scenario looks, the mounting focus on the Reserve Bank and the Governor is in fact aiming at the wrong target. 

It is certainly true that the Governor of the Reserve Bank exercises considerable autonomy in the operation of monetary policy and the control of inflation. But he is not a law unto himself. He works within the provisions of the Policy Targets Agreement concluded with the Minister of Finance and the Reserve Bank Act. Therefore, the real target of criticism for the performance of the Bank and its Governor should be the Minister of Finance. 

This is especially so in the current situation where Orr was not only appointed by the current Minister in 2018, but also reappointed for a further five-year term just this week. Moreover, last year, this Minister also amended the Reserve Bank Act under which the Governor operates. 

That Act not only streamlined the Bank’s governance processes but also balanced the Bank’s historic independence with greater accountability and reporting requirements. It also introduced a provision enabling the Minister of Finance to issue a Financial Policy Remit to the Bank, setting out matters its Board must have regard to. When these changes are added to the Policy Targets Agreement the Minister and the Governor concluded in 2018 requiring the Bank to take employment outcomes into consideration in the operation of monetary policy, the Reserve Bank now has far less operational independence than at any previous point since the current framework was established in 1989. 

Labour was concerned in Opposition that the Bank’s previous sole focus on controlling inflation lacked context, hence the decision to broaden the mandate to also include taking employment outcomes into account. They wanted this to reduce the Bank’s single-minded focus on inflation. However, an unintended consequence of that change has been that the breadth of the Reserve Bank’s influence on the economy has been extended. 

In such circumstances, it is hardly a surprise that the Governor’s role has become more pervasive, as he seeks to balance controlling inflation and maintaining employment levels at a time of rising living costs and a threatening global recession. Nor would it be unreasonable to conclude that the apparent greater influence of the Governor on current economic policy is far more a direct consequence of deliberate policy moves by the current Minister of Finance, than any personal whim of the Governor of the Reserve Bank. 

That is why National, and Act are aiming at the wrong target when they attack Adrian Orr. The real object of their criticisms should be Grant Robertson who has not only twice changed the arrangements under which the Governor carries out his statutory functions, but also appointed and reappointed him to the role. 

Although National and ACT voted against the new Reserve Bank Act last year, it is far from clear they will overturn it when they next return to office. Nor is it clear whether they would amend the Policy Targets Agreement back to a purer focus on controlling inflation. The strong suspicion is they will allow these changes to remain. 

In which case attacking the messenger – the Governor and the Bank – is safer than attacking the message. It is also an easy populist excuse, attacking the Governor and his team for doing the job the government has assigned to them, rather than the job itself. A more direct criticism of the Minister of Finance for his interference in the historic autonomy of the Reserve Bank would require National and ACT to spell out where they truly stand on the Bank’s role and independence, and what they would do to protect and enhance it. In these circumstances, harangues against the Governor are a far safer, if more cowardly, option. 

The independence of the Reserve Bank, guaranteed by statute in 1989, has been hailed worldwide as a strong step towards ensuring the stability of our monetary and banking systems from the threat of direct political influence on their day-to-day operations. Much of New Zealand’s improved economic performance in the last thirty years is because of the Reserve Bank Act, supported by the Public Finance Act and the Fiscal Responsibility Act.  Labour’s meddling with the Reserve Bank since 2017, and now National’s direct attacks on the Governor, pose serious threats to that, to their mutual shame.