Adrian Orr, Governor of the Reserve Bank of New Zealand

The publication yesterday of a review of monetary policy here and overseas has led to a rare response from Reserve Bank Governor Adrian Orr and calls from three political parties for an inquiry into the Bank.

At the heart of the debate is whether the Bank’s decision to “print” $55 billion of money which it leant to trading banks kept the economy going during Covid or instead caused the record inflation levels now being recorded.

In his statement yesterday, Reserve Bank Governor Adrian Orr acknowledged that consumer price inflation was at 7.3 per cent, above the (Reserve Bank Policy Target) Remit range of one to three per cent,” he said.

“I also acknowledge that the Monetary Policy Committee’s decisions over recent years have influenced this outcome.

“This acknowledgment is reflected in our regular Monetary Policy Statements and through our ongoing efforts to quell excess demand in the economy.

But the review by former Reserve Bank Governor Graeme Wheeler and former Treasury economist and consultant Bryce Wilkinson argues that “some central bankers suggested that global forces are the main cause of rapid inflation and pointed to commodity price increases flowing from damaged supply lines due to Covid restrictions and Russia’s invasion of Ukraine.”

They said, “The main cause of inflationary pressures lies in the errors of judgment made by central banks in conducting monetary policy during the Covid pandemic. 

“While Russia’s invasion of Ukraine accentuated the rise in inflationary pressures, commodity prices were already high because of the rapid global expansion in liquidity and debt.”

It is a contestable claim.

The Secretary of the Treasury, Caralee McLiesh, in a recent paper to the New Zealand Association of Economists conference, said New Zealand’s greatest economic challenge was “strong demand interacting with constrained supply.”


She said shifts in demand away from services towards goods had placed pressure on global supply chains, and lockdowns and mobility restrictions, which continued in China, had further disrupted supply.

However, neither the Reserve Bank nor McLiesh help the narrative that the Opposition parties are trying to push at present, which is that the inflation has been caused by excessive Government spending.

That was on display in Parliament yesterday with National Leader Christopher Luxon and the party’s Finance spokesperson, Nicola Willis, both questioning Prime Minister Jacinda Ardern and Finance Minister Grant Robertson on spending.

Luxon asked Ardern if Government spending of $127 billion in the coming year—$50 billion more than just five years ago—would have an effect on inflation and interest rates?

Willis asked whether Robertson had noted the stance of the incoming Australian Labor Government, who had outlined $11.5 billion in budget reductions, and when would he start applying some fiscal discipline in New Zealand?

But Luxon appeared to be having a bet each way on what was behind the inflation.

Yesterday he also called for an inquiry into the Reserve Bank based on the Wheeler-Wilkinson report, “particularly the decision to extend highly stimulatory monetary policy long after the initial response.”

”New Zealanders deserve an independent appraisal of the decision-making during this extraordinary time,” Luxon said.

“Households struggling through a cost of living crisis need assurance that economic decision makers are doing everything possible to prevent a repeat.

“Quite simply, could the worst of today’s inflation hangover have been avoided, and if so, how can we stop it from happening again?”

One of Orr’s most frequent critics, the former Reserve Bank economist Michael Reddell is not quite so supportive of an inquiry.

On his “Croaking Cassandra” blog yesterday, he addressed the Wheeler-Wilkinson paper and the comments it was attracting: “I’m still convinced the (Large Scale Assets Purchase Programme – the “money printing”)  LSAP achieved nothing useful, should not have been deployed, and has cost taxpayers $8bn+ to date, so am certainly not an Orr defender.

“But the specific critique by Wheeler and Wilkinson just wasn’t very persuasive.”

ACT and Green MP Chloe Swarbrick have joined Luxon’s call for an inquiry.

Orr, however, argued that the Bank was already conducting one.

He said the Bank was Reserve Bank is in the midst of its first-ever 5-yearly review of its Monetary Policy Remit.

“This Remit broadly outlines how the Reserve Bank is to conduct monetary policy and the factors it has to have regard to,” he said.

“Any recommendations arising from the review will be delivered to the Minister of Finance for consideration.”

But he said the Bank was also reviewing its recent performance in conducting monetary policy, including the use of additional monetary policy tools.  

And last November, appearing before Parliament’s Finance and Expenditure Committee, he defended the LSAP programme.

“I note that the reason that we entered into the quantitative easing and the use of buying government bonds was to ensure we got interest rates to the level that were necessary to see the economy through this incredibly difficult period and to maintain our mandate,” he said.

“So the total cost or net benefit to the country is not the mark to market movements at all; it’s around have we achieved our mandate? Have we got people employed? Is inflation low and stable? And that is the total benefit to the crown.”

But the question raised in the Wheeler-Wilkinson is whether the LSAP is responsible for the current high inflation and whether that is the actual cost to the country.