Could Adrian Orr govern the Reserve Bank under a hostile National government?

Tuesday, 8 November 2022

National Party finance spokesperson Nicola Willis and Reserve Bank governor Adrian Orr appear to hit a low point in their relationship at a select committee hearing in November.

The National Party would be unlikely to sack Reserve Bank governor Adrian Orr if it won the election but could make it too uncomfortable for him to stay in the role, some central bank experts are predicting.

Financial consultant and former Reserve Bank senior official Geof Mortlock said a new government could in theory change the law to widen the scope for governments to remove Reserve Bank governors on performance grounds and oust Orr.

While such a drastic step would be unlikely and undesirable, it could instead change the make-up of the Reserve Bank’s board and the bank’s remit to make it “very uncomfortable” for him to stay on, Mortlock said.

Finance Minister Grant Robertson reappointed Orr as governor of the Reserve Bank for a second five-year term on Tuesday, despite simmering tensions with the National Party.

National Party finance spokesperson Nicola Willis wrote to Robertson in September saying it would not support Orr’s reappointment for five years without an independent review of the Reserve Bank’s performance, citing concerns over “sustained levels of high inflation”.

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Orr’s reappointment came two days ahead of the Reserve Bank releasing its own long-awaited report on the formulation and implementation of monetary policy on Thursday.

The bank is expected to address in the report criticisms that it allowed inflation to get out of control by misreading the economic risks during the Covid pandemic.

The National Party is understood to believe it would have been appropriate for the Government to have extended Orr’s contract for only one year now, given the election next year and the desirability of maintaining a political consensus over the stewardship of the bank.

Mortlock, an ardent critic of Orr, said a future National government could “make it clear from the get-go that they don't have confidence in Orr and they want him gone and it would be up to him as to whether he bowed out or dug his toes in”.

“They've got numerous levers to make life pretty miserable for him.”

Those could include changing the bank’s monetary and macro-prudential remits or constraining funding for the bank, he said.

“I suspect what they will do is change the composition of the board of directors to bring in people with requisite skills, knowledge and experience, not the odd bunch of people they’ve got there right now,” he said.

Mortlock said there had been tensions between the Reserve Bank governors and governments before, notably during the Muldoon era, but also towards the end of Don Brash’s tenure when Helen Clark was prime minister.

A more recent example was the difference of opinion between former prime minister Bill English and Graeme Wheeler over the desirability of loan-to-value controls over housing.

But in all those cases the disputes had been managed with professionalism, he said.

‘Frustrated and furious’

Infometrics economist Brad Olsen said he was “frustrated and furious” at Robertson’s decision to reappointed Orr for an entire term given there was “good precedent” for a shorter-term appointment.

In 2017, the National Party’s then finance minister Steven Joyce announced he would appoint deputy Reserve Bank governor Grant Spencer as acting governor for six months, as Graeme Wheeler’s term as governor was due to end three days after the general election that year.

“More importantly, the legislation requires the finance minister to consult with the opposition,” Olsen said.

Olsen said legitimate concerns raised by Willis in her letter to Robertson seemed to have been blatantly ignored by Robertson.

“In my mind, you're seeing here a breakdown of the bipartisan agreement around the Reserve Bank's authority and that is concerning.”

Olsen said the Reserve Bank’s board had endorsed Orr for a second term without showing any real concern about inflation being at a 32-year high.

“I can understand how the Reserve Bank’s board and the finance minister might still have reappointed the bank governor.”

But the lack of a conversation around inflation “shows that there are people asleep at the wheel”, he said.

“I’m not saying that anyone might have done better, but I am saying that there needs to be accountability here and there is no accountability at present.”