The government owns the RBNZ, but since 1989, it has operated as an independent body. As such, the RBNZ answers directly to Parliament, and the RBNZ governor is directly accountable for any failure to achieve the price stability and inflation objectives.
You might now think Grant Robertson and Adrian Orr can’t be friends. The Finance Minister just delivered a bigger-than-expected budget, characterised by more spending and borrowing rather than cost-cutting, while the RBNZ governor tries to contain inflation (emphasis on ‘tries’).
So you could say the finance minister is like a shopaholic on a spending spree, throwing caution to the wind and maxing out credit cards, while the RB governor is the frugal spouse desperately trying to wrestle away the shopping bags to save the family budget from going up in flames. It’s a battle between fiscal shopaholism and monetary control.
Should they be friends?
Surprisingly, in the recent OCR release press conference, Adrian Orr didn’t see it this way. In his view, the current government spending is not hindering the RBNZ’s efforts to cool inflation.
Let’s get this straight, we don’t want government and RBNZ to be foes, but should they be friends?
The government can influence the economy through taxation and spending (fiscal policy), while the RBNZ determines money supply and interest rates (monetary policy). If we want our economy to function well, we need some fiscal and monetary policy coordination.
For example, if the government intends to kick-start the economy through increased spending, then the RBNZ should keep interest rates low. This happened after Covid when the RBNZ purchased government bonds and agreed to keep the OCR low while the government pumped money into the economy. Or if the RBNZ wants to boost economic activity through expansionary monetary policy, then it would expect the government not to increase taxes.
If we want a central bank’s actions to align with government policy, why do most countries have an independent central bank? The reason is that long-term economic stability is such an important objective that we don’t want the government to influence monetary policy.
For example, the New Zealand government is elected for three years and thus focuses on short-term economic goals, especially in an election year. If I were the PM right now, running behind in the polls five months from an election, I would also spend money to boost the economy and ease the cost-of-living pressure.
The RBNZ, however, must take a much longer-term perspective and ensure that inflation gets back to the mandated 1-3% and prices become stable again. We also don’t want interference from elected officials or the private sector when a central bank sets interest rates or prints money.
Solving the puzzle
Germany was the first country in 1951 that gave its central bank complete independence. Many countries followed this model, and the trend over the past few decades has been towards greater central bank independence and transparency. The RBNZ was established by the Reserve Bank of New Zealand Act 1989 and became independent on February 1, 1990, with the commencement of New Zealand’s new central banking legislation.
With all of this in mind, let’s try to solve our friend-or-foe puzzle. With inflation at 6.7%, it is no surprise that the RBNZ has been increasing the OCR to discourage spending. At the same time, Grant Robertson announced more operational and capital expenditure and borrowing. In fact, the bond issuance programme is up by $20b from the anticipated amount suggested by the Finance Minister in December last year.
Add to this the inflationary pressure of the big turn in immigration numbers (we expect 100,000 people to arrive in New Zealand), and you could think that Robertson and Orr were foes.
But the OCR increase of 0.25% was relatively modest, and to the surprise of many, the RBNZ sees the current value of 5.5% to be the peak of the OCR with cuts expected in the third quarter of 2024. This signals that inflation is under control and that our central bank is happy with Budget 2023. Clearly, Robertson and Orr are friends.
A quick look at the RBNZ Act 2021, which came into effect on July 1, 2022, confirms this suspicion. The RBNZ Act 2021 replaced the single decision-maker model introduced in the original RBNZ Act with a governance board. This diminishes the RBNZ’s independence as the RBNZ board members are appointed on the recommendation of the Finance Minister.
The RBNZ is no longer as independent as it used to be, so unsurprisingly, we currently see more coordination between monetary and fiscal policy. We don’t want our government and RBNZ to undermine each other’s policies as this would endanger economic wellbeing, but we also need a reserve bank that acts independently. We want it to be the gatekeeper of monetary stability.
I suppose Adrian Orr and Grant Robertson can be friends rather than foes, but acting like best buddies raises concerns about potential conflicts of interest and compromised independence.
Christoph is a Professor of Innovation and Economics at Massey University, the Director of the Knowledge Exchange Hub (Massey University's big data-driven research centre) and the ambassador for Australia and New Zealand of the Kronberg Academy (Germany). This article was first published HERE
So you could say the finance minister is like a shopaholic on a spending spree, throwing caution to the wind and maxing out credit cards, while the RB governor is the frugal spouse desperately trying to wrestle away the shopping bags to save the family budget from going up in flames. It’s a battle between fiscal shopaholism and monetary control.
Should they be friends?
Surprisingly, in the recent OCR release press conference, Adrian Orr didn’t see it this way. In his view, the current government spending is not hindering the RBNZ’s efforts to cool inflation.
Let’s get this straight, we don’t want government and RBNZ to be foes, but should they be friends?
The government can influence the economy through taxation and spending (fiscal policy), while the RBNZ determines money supply and interest rates (monetary policy). If we want our economy to function well, we need some fiscal and monetary policy coordination.
For example, if the government intends to kick-start the economy through increased spending, then the RBNZ should keep interest rates low. This happened after Covid when the RBNZ purchased government bonds and agreed to keep the OCR low while the government pumped money into the economy. Or if the RBNZ wants to boost economic activity through expansionary monetary policy, then it would expect the government not to increase taxes.
If we want a central bank’s actions to align with government policy, why do most countries have an independent central bank? The reason is that long-term economic stability is such an important objective that we don’t want the government to influence monetary policy.
For example, the New Zealand government is elected for three years and thus focuses on short-term economic goals, especially in an election year. If I were the PM right now, running behind in the polls five months from an election, I would also spend money to boost the economy and ease the cost-of-living pressure.
The RBNZ, however, must take a much longer-term perspective and ensure that inflation gets back to the mandated 1-3% and prices become stable again. We also don’t want interference from elected officials or the private sector when a central bank sets interest rates or prints money.
Solving the puzzle
Germany was the first country in 1951 that gave its central bank complete independence. Many countries followed this model, and the trend over the past few decades has been towards greater central bank independence and transparency. The RBNZ was established by the Reserve Bank of New Zealand Act 1989 and became independent on February 1, 1990, with the commencement of New Zealand’s new central banking legislation.
With all of this in mind, let’s try to solve our friend-or-foe puzzle. With inflation at 6.7%, it is no surprise that the RBNZ has been increasing the OCR to discourage spending. At the same time, Grant Robertson announced more operational and capital expenditure and borrowing. In fact, the bond issuance programme is up by $20b from the anticipated amount suggested by the Finance Minister in December last year.
Add to this the inflationary pressure of the big turn in immigration numbers (we expect 100,000 people to arrive in New Zealand), and you could think that Robertson and Orr were foes.
But the OCR increase of 0.25% was relatively modest, and to the surprise of many, the RBNZ sees the current value of 5.5% to be the peak of the OCR with cuts expected in the third quarter of 2024. This signals that inflation is under control and that our central bank is happy with Budget 2023. Clearly, Robertson and Orr are friends.
A quick look at the RBNZ Act 2021, which came into effect on July 1, 2022, confirms this suspicion. The RBNZ Act 2021 replaced the single decision-maker model introduced in the original RBNZ Act with a governance board. This diminishes the RBNZ’s independence as the RBNZ board members are appointed on the recommendation of the Finance Minister.
The RBNZ is no longer as independent as it used to be, so unsurprisingly, we currently see more coordination between monetary and fiscal policy. We don’t want our government and RBNZ to undermine each other’s policies as this would endanger economic wellbeing, but we also need a reserve bank that acts independently. We want it to be the gatekeeper of monetary stability.
I suppose Adrian Orr and Grant Robertson can be friends rather than foes, but acting like best buddies raises concerns about potential conflicts of interest and compromised independence.
Christoph is a Professor of Innovation and Economics at Massey University, the Director of the Knowledge Exchange Hub (Massey University's big data-driven research centre) and the ambassador for Australia and New Zealand of the Kronberg Academy (Germany). This article was first published HERE
1 comment:
The govt/RBNZ setup is absurd. It is just a sham to shield the govt from reaction to negative measures. At the beginning of Covid Jacinda should have put on her longest face and explained that standards of living cannot be expected to move forever forward. Periods of reverse under duress are inevitable and all must wear the consequences. Instead her govt created gross distortions; a frivolous bungy company was paid millions to retain "skilled" staff, many house sellers creamed it. And now the RBNZ is striving to engineer the recession we should have had at the beginning. Many very innocent souls with new mortgages will suffer. And many will lose jobs. Not all of these will be from make work contrived university gobbledygook courses and the like. We have to swamp the country with immigrants, very many not particularly able or net contributors, to maintain activity. On the one hand the govt swampa maori with millions upon millions to lure them from the maori roll and to vote Labour whilst the RBNZ strives to create stress for others.
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