Reserve Bank Governor Adrian Orr fired a warning shot back across the Terrace to the Beehive over the need to ensure the bank’s independence.

He did so with legislation soon to be passed requiring the Bank to have a committee to decide the Official Cash Rate.

The committee will include as an observer, a Treasury observer who it has been decided will initially be Treasury Secretary, Gabriel Makhlouf.

Makhlouf cannot be independent in a purist sense because he is duty bound to uphold Government policy.

Makhlouf attended the most recent meeting of the Bank’s Monetary Policy Committee as an observer, the position he will take up formally when the legislation allowing for the committee which is passed by Parliament.

The Bill is currently before a Select Committee.

The proposal to make a committee rather than the Governor responsible for the Bank’s decisions on the Official Cash Rate has been greeted with cautious approval.

The Bankers’ Association supported it.

Federated Farmers were slightly more cautious; their concern being whether it could erode the Bank’s independence.

“A formal committee has the potential to increase knowledge and avoid capture by one person,” it said in its submission to the Finance Expenditure Select Committee.


“However, our key caveats are that such a committee needs to preserve the Reserve Bank’s operational independence and its accountability and that there is sufficient evidence that it will actually result in better decision-making.

“Possible disadvantages include risk of ‘group-think’ and if there are external members muddied accountability and the potential for political appointments.

“In order to preserve the RBNZ’s operational independence the committee should be appointed by the RBNZ and not by the Minister, and there should not be a Treasury member on the committee (although it would be appropriate for a Treasury observer to be present).”

The question will now be whether Treasury having decided that Makhlouf will be their representative he can be truly independent given his role in things like the preparation of the Budget.

Orr, however, said he was not surprised that Treasury nominated Makhlouf.

“With a Treasury observer coming on board you want a very senior person to be anchored there,” he told the Monetary Policy Statement press conference yesterday.

He said the challenge for the “very senior person from Treasury” might be balancing his diary.

“But it is great to be able to chat about the fiscal policy situation etc. and get another sense.”

He said the Bank was wide open for a diverse set of views coming in.

Responding to a question about earlier criticism of the idea of having a Treasury observer, Orr said that it was the Government’s decision.

“But the observer status has been much better understood.

“We’ve published the hoops you have to jump through to show you are not conflicted and what you can and can’t do with the information.

“So a lot of that detail has now been put to bed.

“It wasn’t as simple as just walking across the road and saying what’s up mate.

“It is quite a complex situation.”

But then Orr added his warning.

“Let’s wear our heart on our sleeve here for a moment; operational independence is critical for a central bank.

“So anything that feels like it might be starting to be threatened is going to be strongly defended.

“So we’ve got the belts and braces in there for now.”

Asked specifically if he thought the Bank’s independence was being eroded by the changes, Orr said: “No, I don’t.

“But just because I am not paranoid doesn’t mean they are not watching.”

“Just keep a really really good idea and outlook for that because we know what the alternatives look like.

“Independence is about having the confidence you will make the right call based o the purpose it is needed for, but it is also about believing you have got enough confidence and mana to really look for a wide set of advice in making that decision.

“Independent doesn’t mean isolated.”

And what some may interpret as a subtle criticism of his predecessors, Orr said that the Bank needed to ensure it got that balance right.

“Otherwise people call for legislative reviews don’t they.”

However, there would be unlikely to be much discomfort in the Beehive over yesterday’s Monetary Policy Statement which confirmed that the Official Cash Rate would stay at 1.75%.

It says: “Conditions are in place for a sustained economic expansion.

Fiscal stimulus, monetary stimulus, and the lower exchange rate are all supporting economic activity.“

There, however, remains the paradox of low business confidence.

“Despite these drivers, business surveys indicate that firms’ activity is expanding only slowly. “

“Risks to global growth, such as international trade tensions, continue to increase.

The Statement says GDP growth is expected to increase.

Interestingly in the other change facing the bank – the need to include maximum sustainable employment in its objectives — Orr has raised the question as to whether monetary policy can have any more impact on an employment market currently recording the lowest unemployment rate since 2008.

“Indicators of labour market tightness suggest that employment is near its maximum sustainable level,” it says.

“Further increases in employment growth would likely depend on firms raising wages faster to attract suitable workers, which would place upward pressure on inflation.”

If that did not happen, the Statement suggests the answer might lie in the Beehive, not the Reserve Bank.

“A structural (sustainable) improvement in employment would require non- monetary approaches to improve the alignment of labour supply and demand (for example, through education and training programmes).”

It is that tension between monetary and fiscal policy which lies at the heart of the Bank’s determination to preserve its independence and why that matters so much to the Governor.