Adrian Orr tones down his hostility to Nicola Willis

Reserve Bank governor Adrian Orr's latest appearance before Parliament's finance and expenditure committee (FEC) was a notably more civil affair than previous outings, particularly in how he handled questions from National's finances spokesperson Nicola Willis.

On past outings, Orr's attitude towards Willis has been hostile, patronising and condescending.

At sessions I've attended, you could cut the tension between the pair with a knife.

It's probable that Orr has an eye on recent polling showing National and Act are likely to form the next governmnent, in which case Willis is likely to become the next finance minister and the minister Orr will be obliged to report to.

On Thursday, Willis didn't tone down her rigorous questioning, however. It's just that Orr didn't let his temper get the better of him, as he evidently has in the past.

For example, she asked about the failings of RBNZ's forecasting in, for instance, forecasting a year ago that inflation would be down to 4.1% “and here we are at 6%,” and he managed to answer in civil tones.

At the media conference on Wednesday, Orr shrugged off questions about the potential change in political masters.

Staying put

Asked whether he intends to serve out his current term and whether he would hand in his resignation, should the incoming government ask for it, Orr said: “I don't have any comment on that. I'm employed for another five-year term.”

Both National and Act made no secret of their opposition to Orr's reappointment to a second five-year term – both parties made their opposition clear before the Labour government announced the reappointment in November last year with the second term starting in March this year.

Willis said she was appalled at the reappointment: “We urged the Government to conduct an independent review of the bank’s performance before endorsing the governor for another five years,” she said.

Act leader David Seymour said Orr's first term was “a term of poor leadership, poor focus and poor outcomes” and lambasted Orr's failure to take responsibility for inflation soaring to 7.3% in the June quarter of last year, well outside RBNZ’s 1% to 3% target.

Much of the business community and certainly the banks, who have long been chafing under Orr in his role as head of prudential regulation, agree with National and Act's views.

If Orr serves the full term and National and Act do form the next government, they would have to deal with him beyond the following election, if they won a second term.

Preserving RBNZ's independence

We can take it as read that both Act and National would like to see the back of Orr. But the problem they'll have to grapple with is that the Reserve Bank is supposed to operate independently from the government of the day.

Jeopardising that hard-won independence would be a mistake and would do New Zealand a profound disservice.

On Wednesday, Orr acknowledged politicians' power over the bank: “Our legislation is written in law. Future governments can change the law. That's all I can say. We believe we're in a very strong position as a central bank, doing its job for Aoteroa New Zealand.”

But there's no question Orr and the new monetary policy committee – it was formed in 2019 – did abjectly fail to perform their assigned task of keeping inflation under control.

Orr loves to point to the global nature of the inflationary period that emerged from the covid crisis and he did so again on Thursday, saying the battle has been “a global challenge.”

In other words, Orr wants to be excused his failings on the grounds that RBNZ's policies were just as wrong-headed as the policies of just about every other central bank, while being given credit for having started to raise rates earlier than most.

I remain convinced that the orgy of money printing so many central banks indulged in was a huge mistake.

An unfortunate decade

Unfortunately, the experience through the post-GFC period when so many of the major central banks were printing money with no apparent inflationary result – indeed, inflation kept undershooting targets – lulled the economic world into a false sense that such policies could be pursued with impunity.

But, as former Bank of England governor Mervyn King has said: “If you simply print lots of money at a time when you’re producing less, you’ve got a classic case of too much money chasing too few goods, and the result is inflation.”

But there's no acknowledgment by Orr that the $55 billion RBNZ spent on its money-printing program, known as the large-scale asset program, was a mistake, even though its losses are expected to be about $10 billion.

Indeed, Orr still regards it as “a tool” in his monetary policy toolbox.

But back to that answer to Willis' question about RBNZ's inflation forecasting failures.

The tone might have been civil, but the substance of the answer was to try to blame the difference between a 4.1% forecast and a 6% outturn on February's Cyclone Gabrielle.

One factor has been supply shocks and “a year ago, we didn't know Cyclone Gabrielle was going to be here,” he said.

Willis asked how much of the difference was due to the cyclone and Orr said: “I don't know.”

Seems a stretch

Willis responded that it seemed “a stretch to me to suggest Cyclone Gabrielle was responsible for a two-point differential in the inflation rate.”

Her scepticism was soon vindicated when committee chair Ingrid Leary asked Orr how much inflation the cyclone was actually responsible for.

RBNZ official Rebecca Williams came forward to tell the committee that the cyclone had less of an impact than the central bank had originally expected, adding between 0.1 and 0.2 percentage points, “and most of that was in fruit and vegetables.”

Conway then leapt in to try to save Orr's face by talking about how forecasting is difficult in any case, but that all the various shocks of recent years have made it even harder.

He nevertheless gave RBNZ a metaphorical pat on the bank: “We're actually pretty good at it, relative to other NZ forecasters.”

That did strike me as gratuitous and inappropriate, given the extent of RBNZ's failings.

While I've focused on just a single instance, RBNZ's past form means the odds against its latest forecasts being anywhere near what actually happens are enormous.

And as former RBNZ official Michael Reddell put it in his blog, senior people at RBNZ now “have an alarming record of just making stuff up (and getting away with it).”

Past examples

For example, in November last year, Orr told the FEC that to have kept inflation between 1% and 3%, “we would've had to predict the 2022 Russian invasion of Ukraine in early 2020” and he repeated that claim later in the same session.

Inflation had been outside the target range since the June quarter of 2021 and had reached 5.9% by the December quarter of 2021, two months before Russia's invasion.

In December 2021, RBNZ officials arguably misled the FEC by denying it had lost 10 out of 25 of its most senior staff since June of that year.

Later that day, the central bank confirmed it had indeed lost 10 senior staff, but that their ranks had numbered 26, not 25.

Reddell is in no doubt that the incoming government will need to act to address such deliberate attempts to mislead.

“Any new government will face a lot of challenges and a lot of areas of the public sector really need sorting out,” he wrote.

“Given the great power handed to the RBNZ, their glaring failures in recent years, and their apparent indifference to matters of integrity, the combination of considerations mean they should be high on the priority list for a new minister of finance.”