Former Reserve Bank governor Graeme Wheeler takes swing at central bank 'hubris'

Monday, 25 July 2022

Essay criticises the Reserve Bank’s embrace of indigenous history as a diversion from its core responsibilities.

Former Reserve Bank governor Graeme Wheeler has blasted the performance of the Reserve Bank, now led by Adrian Orr, and other central banks around the world during the Covid-19 pandemic.

In an essay co-authored with New Zealand Initiative research fellow Bryce Wilkinson, Wheeler accused central banks of “errors of judgement” in overdoing interest rates cuts and their policies of quantitative easing, and said they should acknowledge their mistakes.

Wheeler and Wilkinson said a persistent theme during the pandemic was “central bank hubris; a trust in policy frameworks, models, assumptions and their own professional competence that would eventually prove to be unwarranted”.

Wheeler governed the Reserve Bank from 2012 to 2017, shortly prior to Orr’s appointment in 2018.

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In New Zealand, quantitative easing saw the Reserve Bank buy $54 billion of government bonds in a bid to drive down longer-term interest rates and sustain investment and employment.

But that has been blamed for putting a rocket under house prices and creating an asset bubble.

Reserve Bank governor Adrian Orr not buying into 'regret analysis' in May.

Wheeler and Wilkinson said in their essay that loose monetary policies were the main cause of inflation, about which they said central banks had become complacent.

Central banks “overdid interest rate cuts and the scale of their quantitative easing” when it was clear from the tightness of the labour market and rising bond yields that inflation pressures were starting to build, they said.

“Excessive monetary stimulus pushed up commodity and equity prices, narrowed risk premiums and led to rapid inflation in housing markets,” they said, also adding those outcomes were predictable.

While it’s good for savings, for homeowners it means interest rates could be on the rise too.

Restoring price stability would now be a “painful process”, they said.

Annual inflation is currently running at 7.3%, far above the Reserve Bank’s target band of 1% to 3%.

Orr told a select committee in May that he would continue to have no regrets over the Reserve Bank’s management of inflation.

The Reserve Bank was one of the first in the world to stop quantitative easing and to start raising interest rates, Orr has also previously noted.

But Wheeler appeared to call for an admission of failure.

“To begin restoring their damaged credibility, central banks must assess and acknowledge why their models and judgements were so inaccurate and inform the public on what steps they are taking to rebuild public confidence,” he said.

Wheeler and Wilkinson cited the Reserve Bank’s moves to embrace New Zealand’s indigenous history and culture and “adopt a Māori world view” in the operations of the bank as an example of central banks taking their eye off their core responsibilities.

Under Orr, the Reserve Bank has also placed greater attention on issues related to climate change, but Wheeler and Wilkinson described that as an “extraneous political issue” distracting central banks.

The criticism comes on the heels of a separate broadside from former Reserve Bank chairman Arthur Grimes, who last week accused the Reserve Bank of incompetence in failing to control inflation.

A Reserve Bank spokesperson said it became aware of Wheeler and Wilkinson’s paper late on Monday afternoon, so had no comment to make.

“We are currently carrying out our statutory five-yearly review of monetary policy and we have encouraged the public to make submissions,” he said.

Infometrics chief researcher Gareth Kiernan said he believed Wheeler and Wilkinson’s critique was fair, both overall and in particular for its criticism of central bank’s reliance on economic models.

“Central banks and governments have become increasingly scared of any sort of slowdown that might verge on a recession,” Kiernan said.

“A bit of a clean-out from time to time does hurt, but is also good for the economy.”

Although Orr said he would not be buying into “regret analysis” over inflation, Kiernan said the credibility of central banks around the world had been damaged over the past year “as inflation has pulled away”.

“If you are going to say, ‘we didn't get it wrong, we don't have any regrets’, then I do think that is unhelpful in terms of actually trying to restore the credibility that's already been lost,” he said.