As Adrian Orr abruptly departs the Reserve Bank, it's a good time to think about what type of central bank we want

“The defining feature of Adrian Orr’s first Monetary Policy Statement is the clarity of the message,” BNZ Head of Research Stephen Toplis said.

“Instead of having to flounder through screeds of mumblings to find out what the Bank really thinks, the message is up front.”

These comments, from long-time Reserve Bank (RBNZ) watcher Toplis, come from May 2018. The RBNZ had just completed its first Official Cash Rate (OCR) review since Adrian Orr took the helm as Governor. Orr, of course, left the RBNZ abruptly last week.

I open with those comments to contrast the breath of fresh air Orr was seen as when he took the RBNZ helm, with the criticism and flak he has faced over more recent times. If seven days is a long time in politics, seven years is a lifetime in central banking.

Orr took a pay cut to swap being CEO of the NZ Super Fund to return to the RBNZ. His previous stint at the RBNZ saw him serve as Deputy Governor and Head of Financial Stability between 2003 and 2007.

Prior to that Orr had been Westpac's New Zealand Chief Economist from 2000 to 2003, Chief Manager of the RBNZ's Economics Department from 1997 to 2000, and had also worked at the National Bank of New Zealand, the Treasury, the OECD and the New Zealand Institute of Economic Research.

Thus in the NZ financial markets, economic, political and business/financial media circles Orr was well known.

Change

At the time of his appointment the then-Finance Minister Grant Robertson said Orr had the skills to successfully lead the RBNZ through a period of change. Underway at that time was a major review of the 1989 Reserve Bank Act, which had effectively established the modern inflation targeting RBNZ.

The contrast between Orr and his austere, grey predecessors was stark. A gregarious character, his public persona suggested he was more likely to be the person who brought the punchbowl out at a party rather than put it away. He broke the traditional mould of a RBNZ Governor. 

In his early days, after Orr had made a speech at a conference I hadn't attended, I got a phone call from an RBNZ media relations person pointing out his comments from the conference about the NZ dollar, reported by a major newswire, had in fact been a joke. Knowing Orr from his time at the Super Fund, this was easy to believe.

It was quickly apparent Orr was a more accessible Governor than his two immediate publicity shy predecessors. In a video interview with interest.co.nz in April 2018, the type of interview RBNZ Governors had rarely done before, Orr said he wanted more staff to beef up prudential regulation, and was keen to get a debt-to-income ratio tool added to the regulator's macro-prudential toolkit, which would require Robertson's sign-off. This was ultimately achieved.

Notable changes in the RBNZ's monetary policy mandate, agreed between Orr and Robertson, saw the RBNZ required to target maximum sustainable employment via its monetary policy remit alongside inflation, and the establishment of a monetary policy committee to make OCR decisions, rather than leaving them just to the Governor.

The Deposit Takers Act is also leading to significant changes, most visible to the public via the introduction of a depositor compensation scheme, due to take effect from about July this year.

Orr was not shy when it came to issues such as climate change, financial inclusion and Māori, to the chagrin of some critics who felt he should stick to his knitting. Given the RBNZ's financial stability remit, and the fact it regulates insurers, I would argue taking an interest in climate issues is crucial.

The Orr-led RBNZ also teamed up with the Financial Markets Authority to review bank and life insurers' conduct and culture in the wake of damning findings from the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Battle

Orr's second year as Governor saw the RBNZ's push to increase banks' regulatory capital come to a head in a battle with the big four banks, ANZ NZ, ASB, BNZ and Westpac NZ. This was the culmination of a process begun before Orr took over as Governor.

The capital requirements were increased with the RBNZ making the assumption NZ wasn't prepared to tolerate a system-wide banking crisis more than once every 200 years. This while Orr described bank capital as; "The number one safety valve for citizens of a country because that allows us to absorb losses before it becomes taxpayers' losses and/or future generations' losses."

Under Orr's tenure the big four banks were also required to meet the RBNZ's revised outsourcing requirements, so if necessary they can operate independently from their Aussie parents. It was a process involving thousands of staff and costing the banks hundreds of millions of dollars.

And against the backdrop of a perceived threat from cryptocurrencies, the RBNZ began looking into the possibility of introducing a central bank digital currency.

Here comes Covid

A few short months after the capital review ended in late 2019, the Covid-19 pandemic gripped the world in early 2020. The response to this became the defining aspect of Orr's tenure.

In the early days, with grim forecasts of the potential impact of the virus on the public and their economy, the border closed and a lockdown looming, the RBNZ cut the OCR to a record low of 0.25%, saying it'd remain there for at least 12 months.

Against the backdrop of stress in international and domestic bond markets, it also embarked on quantitative easing (QE) for the first time, removed loan-to-value ratio (LVR) restrictions on banks' low equity mortgage lending, and rolled out a funding for lending (FLP) programme, offering banks billions of dollars of funding priced at the OCR.

Despite the biggest disruption to the global economy since World War II, and as NZ successfully kept Covid-19 at bay, it became apparent as 2020 went on that the world wasn't going to end. Additionally, with very generous regulatory settings in place and job security thanks to the Government's wage subsidy scheme, New Zealanders - encouraged by their banks to borrow who in turn were encouraged by Orr to lend - returned to their favourite hobby of bidding up house prices and filling their boots with mortgage debt. The housing market took off like a rocket.

Early in the pandemic some observers suggested the stars were aligning for the end of three decades of deflation and a return to a higher inflation world. And, sure enough, as 2021 progressed and inflation rose, pressure mounted on the RBNZ to wield its OCR tool. It started increases on October 6, ahead of many other central banks but not soon enough for critics.

As inflation rose and mortgage rates climbed sharply, Orr and the RBNZ came under fire. Cost of living issues dominated the media as the Consumers' Price Index peaked at 7.3% in June 2022, its highest level in 32 years. Orr's image with the public wasn't helped by his admission the RBNZ was deliberately trying to engineer a recession.

'Particularly conservative'

With the change to a National-ACT-NZ First government in 2023, maximum sustainable employment was removed from the RBNZ's monetary policy remit, and a parliamentary banking inquiry was launched alongside a Commerce Commission market study into personal banking services begun under the previous Labour government.

As inflation started to subside, questions over the RBNZ's oversight of banks began to emerge. The Commerce Commission suggested changes to bank regulatory capital settings to boost competition, an issue that has also emerged in the ongoing parliamentary banking inquiry. This issue Orr described as a red herring.

Finance Minister Nicola Willis, however, noted the RBNZ's prudential regulatory settings were "particularly conservative," and it was time for "another look." With her government talking about trying to improve productivity and boost economic growth, Willis says she is getting advice on whether there's a need for legislative change to force the RBNZ to loosen its rules.

Asbestos, Project Waitoa & the IMF

Meanwhile, going on behind the scenes is the renegotiation of the RBNZ's five-year funding agreement with the Finance Minister. The current one ends on June 30 meaning the new agreement needs to be finalised before then. The Government Willis is part of has made much of cutting public spending, and the RBNZ must look an appealing target for a dose of this.

Over Orr's tenure the RBNZ has certainly grown. As of June 30, 2024, total full-time equivalent staff numbers had reached 601, up from 255 on June 30, 2018. Annual staff expenses rose to $94 million from $32 million, with operating expenses rising to $182 million from $76 million.

Clearly these are major increases. However, it's important to note this has occurred with the RBNZ, previously an idiosyncratic, light handed regulator by international standards, being dragged into the international prudential regulatory mainstream.

And why has this happened? Notably due to an International Monetary Fund (IMF) Financial Sector Assessment Program report on NZ, published in 2017. It was the IMF's first such report on NZ in 12 years and highlighted just how far from the Western World regulatory mainstream the RBNZ was, with it not ticking several of the IMF's key boxes.

In its post-election briefing to the incoming Willis, the RBNZ made a case for an increase in funding noting a need to improve its digital and cyber resilience, plus data and analytics strategy. Furthermore its offices at 2 The Terrace, Wellington were "in urgent need of refurbishment to ensure the safety and well-being of staff due to encapsulated asbestos."

A "significant programme of work underway" would need to be rolled over into the new five-year agreement. This, it said, included legislated change through the Deposit Takers Act and Depositor Compensation Scheme, plus capital expenditure for the refurbishment of 2 The Terrace and Project Waitoa, which is the development and implementation of new vaulting and cash processing infrastructure.

Orr's tenure saw cultural change within the RBNZ. The departure of Deputy Governor Geoff Bascand in late 2021, after sharing information about a restructure resulting in a number of senior staff leaving, showed Orr's leadership style wasn't appreciated by everyone.

Orr's unexpected departure from the RBNZ, we're told by RBNZ Chairman Neil Quigley, was simply because; "Being Governor of the Reserve Bank is a difficult job, and he feels he's achieved the things he wanted to achieve." 

His departure comes with three years left on his second five-year term as Governor, with the RBNZ facing potential funding cuts, and the possible loosening of its prudential regulatory settings.

Taking stock

Initially seen as a good communicator, as the pressure mounted during his tenure Orr came under criticism, being accused of being overly defensive and thin-skinned. His press conferences could feature a happy, chirpy Governor, or a grumpy, frustrated one. 

The decision to go so big on QE, by buying $53 billion worth of government and local government bonds, remove LVR restrictions, launch the FLP and hold the OCR at 0.25% for as long as the RBNZ did, from March 2020 to October 2021, rightly came under criticism.

And with a long awaited focus going on banking competition, it's reasonable to take a good look at the RBNZ's financial stability settings. Loosening them would, however, increase risk. So it's also reasonable to look at the level of risk New Zealanders are willing to stomach. Especially those for whom the finance company, and even 1987 share market crash, remain etched in their minds. Getting the balance right is crucial.

Orr's departure is a good opportunity to take stock of what we want from our central bank. It's important to remember the RBNZ is a wide ranging central bank. They don't just review the OCR every six weeks and then disappear for a long summer holiday. There's also the aforementioned financial stability oversight, money and cash responsibilities, and an important role in payments and settlements.

Some other countries, including Australia, have more than one entity doing what the RBNZ does. The Reserve Bank of Australia is responsible for monetary policy and the Australian Prudential Regulation Authority for financial stability. Is that a model we should look at seriously in NZ?

The Government is already looking to shift oversight of banks and insurers for compliance with anti-money laundering laws from the RBNZ to the Department of Internal Affairs.

Independent? Yeah, right

We're often told the RBNZ is independent. But its independence has obvious limits. Its funding is approved by the Finance Minister, it operates under laws and remits set by the Government and Finance Minister, and its Governor is appointed by the Finance Minister.

Willis declared the National Party "appalled" by Orr's reappointment to a second five-year term by Robertson in late 2022 without an independent review of the central bank’s performance. The RBNZ itself commissioned a review, acknowledging it should've shifted sooner from the ultra low OCR and QE. Willis described this as the RBNZ marking its own homework.

All this highlights the RBNZ is never far from politics.

If we're taking stock of the RBNZ's other responsibilities, what about looking at the dogmatic world of monetary policy too? Is engineering a recession, resulting in people being turfed out of jobs, the best/only way to run 21st century monetary policy? And does the RBNZ, a central bank from a small trading nation bobbing around at the bottom of the world, really have as much influence over inflation as some believe?

As Orr beat a hasty retreat last week, it's clear that he served as RBNZ Governor in interesting times, which we all lived through for better and worse. Mistakes were made along the way. Whether it's Acting Governor Christian Hawkesby or someone else who emerges as Orr's long-term successor, it ain't going to be the same. They broke the mould when they made Adrian Orr.