Adrian Orr’s resignation gives the Government an opportunity to influence the Reserve Bank and any candidate seeking to replace him

The Reserve Bank (RBNZ) will appear before Parliament’s banking inquiry later this month, with Acting Governor Christian Hawkesby fronting.

This puts him in a tough spot. He could be a strong candidate for promotion following Adrian Orr’s resignation. But his role as Deputy Governor/General Manager Financial Stability Group, in overseeing the strict capital requirements now opposed by the Government, may hurt his chances.

A new governor will be recommended by the RBNZ’s board of directors, but Finance Minister Nicola Willis has the authority to reject the candidate and request an alternative.

She has already sought advice on whether the Government can require the central bank to loosen its capital rules, but wouldn’t need to intervene if the next governor was willing to do so themselves.

BNZ’s head of research, Stephen Toplis, said the RBNZ’s board would be "reluctant to suggest a replacement who had the same views as Orr on banking sector capital requirements."

And so, anyone positioning themselves for the top job has a strong incentive to signal to the Minister and board that they would be willing to review and relax banking regulations.

Hawkesby will have an opportunity to do exactly this when he appears before MPs to discuss banking competition on March 26. If he sticks to the RBNZ’s position that banks should hold more capital to ensure financial stability, he may inadvertently rule himself out as a candidate.

That would be a pity, as Hawkesby has had a long career in central banking and has the even temperament many commentators felt Orr lacked. While he may not be the leading contender for the job, he should at least be considered an option.

If he were to tell the inquiry he saw a way to ensure financial stability without such onerous capital requirements, it could improve his prospects. In that sense, the independence of the RBNZ’s financial stability regulation is already somewhat compromised.

Orr’s sudden departure has given Willis a political lever at the precise moment she wants to influence the bank. This is why central bank governors have five-year terms, and why Orr resigning during two contentious policy debates was treated as a scandal.

Even if the RBNZ now genuinely believes a different set of rules would be better, it will appear as though it is responding to the political pressure that has built up around the central bank.

This politicisation started in 2022 when National and Act opposed Orr’s reappointment. Grant Robertson was right not to agree to their demand to let them choose a new governor after the 2023 election. But he should have recognised Orr’s position was untenable and found an acceptable replacement. That mistake has led us here.

Credible change needed

While there’s no evidence that Willis is using Orr’s departure to push for change at the RBNZ, the opportunity is there if she chooses to take it. And the truth is, the RBNZ needs reform.

Even Orr’s staunchest defenders should recognize the central bank’s credibility has been damaged. Whether its critics were entirely fair is beside the point.

Kiwibank’s economists said last week that the bank’s communication and transparency declined during Orr’s tenure, and a new governor would present an opportunity to course-correct.

“We think it was fair to say the RBNZ was one of the most transparent in the world, and leaders in monetary policy… not today,” they wrote. 

That’s quite a statement to print under a major bank’s letterhead.

Willis must resist any urge to appoint a compliant governor and instead choose a strong candidate capable of rebuilding trust. An international candidate may be the best option, as local candidates often have connections, conflicts, and histories that could complicate the process.

ASB’s Nick Tuffley jokingly suggested Jerome Powell, whose term ends in 2026, while Oliver Hartwich of the New Zealand Initiative more seriously proposed German central banker Jens Weidmann.

Twitter rumours that Bill English could be chosen should be dismissed out-of-hand, as appointing an unqualified former politician would only damage the bank's credibility further.