If Wheeler goes, will the Reserve Bank opt for safety or maverick?

Tuesday, 24 January 2017

OPINION: While first term of Graeme Wheeler as Reserve Bank Governor still has around nine months to run, and there has been no official word he plans to step down, speculation mounts that he will serve only one term.

Economics blogger Michael Reddell, a former Reserve Bank advisor who focuses much of his attention on his former employer (especially the governor himself), says he has been told Wheeler has informed colleagues he intends to stand down.

Wheeler declined to comment on whether he would seek a second term when asked during a press conference in late 2016, but given the criticism he has endured, it would be more of a surprise if he was to continue beyond September.

The former Treasury deputy secretary and World Bank official has come under fire from a number of sides, from his decision to raise interest rates in 2014 and failure to hit inflation targets, to his poor communications on interest rate strategy and housing interventions. Some - including Treasury - have questioned whether he has overstepped his mandate.

Now, economists and other observers of the central bank say the Finance Minister (who accepts or rejects a recommendation from the Reserve Bank's board) faces a choice - the safety of promoting an internal candidate, or an outsider who will naturally be less tied to the bank's past, who must be a strong communicator.

The stakes are high. As well as a salary of more than $660,000, the governor ultimately has sole responsibility for setting the benchmark official cash rate, which directly influences the returns on savings and the cost of mortgages.

The governor is also ultimately responsibility for monitoring the health of the financial system, giving them the power to effectively control who can or cannot get a loan from the bank, or whether the bank should charge particular borrowers more.

Although the list is not exhaustive, a handful of names appear to be emerging as the next central bank head.

Adrian Orr, chief executive of the New Zealand Superannuation Fund

Something of a maverick, Adrian Orr has been tipped by so many as a leading prospect to become the next head of the Reserve Bank that he appears to be the favourite.

A former deputy governor, who has also been chief economist at Westpac, Orr has headed the Super Fund for an enormously successful decade. On paper at least, he should be a near certainty if the board were to opt for an external candidate.

But giving him the job would come with risks. Orr is famously flippant to the point where he has been accused of indiscretion. A highly entertaining character, Orr has the smarts to effectively communicate the Reserve Bank's message. But entertainment is not the governor's job. It is difficult to believe he will stick to the script.

While the Reserve Bank is in dire need of an able communicator, markets turn on phrases from the governor. Making off the cuff remarks could turn out to bite him, and no one can possibly know how Orr would respond to that kind of pressure.

Taking the job would likely mean a substantial pay cut (Orr is believed to be New Zealand's highest paid public servant at NZ Super, with a pay packet including bonuses of $950,000 in 2015/16) but figures who know him say Orr's lack of extravagance, coupled with his ambition, would likely make the governor's job attractive. Asked in 2016 if he was interested in the job Orr, uncharacteristically, declined to comment.

Grant Spencer, deputy governor of the Reserve Bank of New Zealand, head of financial stability

When Graeme Wheeler was appointed governor in 2012, Spencer was seen as the man who missed out, and some suspected he would quit.

A deputy governor for (at the time) five years, Spencer has now been head of financial stability for a decade, a period during which monitoring of the financial system has arguably become the Reserve Bank's primary job, superseding its inflation targeting and interest rate setting role. For good measure, he also previously headed the central bank's economics team and spent a decade of his career working in senior roles at ANZ.

Has his time passed? The Reserve Bank's rules effectively mean Spencer may not even be eligible for a single five-year term as governor (he turns 65 some time this year, and the Reserve Bank Act effectively precludes governors who are 70).

There are signals he is interested, or alternatively, that he is seeking a different job. This month Spencer uploaded a freshly minted resume to his LinkedIn profile.

As an aside, how open is the Reserve Bank? It flatly refuses to say how old Grant Spencer is, in spite of the age limit. 'How are (ages) relevant?,' the Reserve Bank's long, long time communications head Mike Hannah asked. If the Reserve Bank is concerned about the privacy of its people, it might counsel Spencer on the wisdom of including his mobile phone number, home address and names of his family in a publicly available CV.

Geoff Bascand, deputy governor and head of operations

The former Government Statistician is tipped to be the most likely internal candidate, because of his experience as a recent former chief executive (Statistics New Zealand) as well as a period as a leading economist in his own right. A former head of forecasting at Treasury, he later spent six years heading the labour market policy group at the former Department of Labour. Bascand appears to have little private sector experience, which would not rule him out for the job, but it does not help.

While some market commentators described his being 'boring' as a plus, it remains to be seen how he would react to the spotlight. Bascand fronted the Reserve Bank's decision to begin charging for some Official Information Act requests as a matter of policy. Seen by some as a Wheeler appointment, his links to the current governor could work against him.

Dr John McDermott, assistant governor, head of economics, Reserve Bank of New Zealand.

During the fallout from the leak of the Official Cash Rate decision, McDermott led a bid to build a bridge between the media and the governor after Wheeler immediately called an end to embargoed lock ups. It came to nothing, but it was something that he tried. McDermott's extended interview on Radio New Zealand in late 2016 highlighted how rarely the Reserve Bank speaks directly to the public, preferring its turgid, behind closed doors speeches.

The Reserve Bank's role is increasingly focused on monitoring the health of the financial system, rather than setting interest rates, a fact which could count against McDermott, who has focused mainly on economics. One market economist said McDermott could be patronising, while his relationship with Treasury has also been questioned.

Rodd Carr, vice chancellor, University of Canterbury, former Reserve Bank chairman

Several months before Carr stood down from the board of the Reserve Bank, one senior market economist mused that, should Carr quit the board, it would be a sign he was going for the job of governor. There have also been claims of disagreement across the central bank's board which led University of Waikato vice chancellor Neil Quigley to take over. When asked about his ambition to take up the role in mid-2016, Carr refused to comment.

Carr, who has had a distinguished career in banking, was acting governor of the Reserve Bank before Alan Bollard took the role in 2002. One observer said Carr's eyesight made it difficult for him to read the mood of meetings, which could impact his ability to communicate effectively. 

Murray Sherwin, Productivity Commission chairman

Like Spencer, Sherwin is a well regarded career economist and chief executive who has coveted the role of governor in the past, apparently narrowly missing out when Don Brash quit to enter politics.

Since leaving the Reserve Bank in 2001 after 25 years, Sherwin has held a range of top jobs in the public sector, including chief executive of the Ministry of Agriculture and Forestry and more recently as chairman of the Productivity Commission.

His string of top appointments points to a strong relationship with the Beehive. Also in his 60s, he time will count against him if the Government wants a governor who could serve two terms.

International candidates

In the months leading up to Graeme Wheeler being appointed, few in New Zealand raised him as a possibility, despite the former Treasury deputy secretary having a distinguished career at the World Bank.

It is possible that another figure will emerge from overseas, with several spoken to naming the bank's former head of economics David Archer, who now works for the Bank of International Settlements in Basel (although one noted that Archer, who has lived outside New Zealand for more than a decade, now has a young family and a 'fairly cruisy' job).

The new governor may not be a Kiwi. In 2013 the Bank of England appointed former Bank of Canada governor Mark Carney as its governor, the first non-Briton to hold the role since the bank was established in 1694. The role in Wellington could prove attractive to international candidates, including possibly a rising star from across the Tasman.