Reserve Bank Governor Adrian Orr and Deputy Geoff Bascand -- they led the Bank through the 2020 Covid response

The Government is under siege from Opposition parties and the Greens over the Reserve Bank.

The parties want an independent inquiry into the Bank’s actions, particularly in 2020, to prevent a Covid recession.

They are getting support from some of the country’s most eminent monetary economists.

At the heart of the debate is whether the Reserve Bank took an overly pessimistic view of likely unemployment and consequently “printed” too much cash, which is now fueling inflation.

A former Bank chairman and monetary economist, Arthur Grimes, has said the Bank had been “incompetent, really incompetent” in the way it had managed during Covid.

And the  co-author of the NZ Initiative paper criticising the way central banks had managed Covid, Bryce Wilkinson, yesterday told POLITIK that Reserve Bank Governor Adrian Orr had been “playing with fire on inflation way before Covid.”

It is a politically sensitive debate but also an important one.

The independence and performance of the Reserve Bank is a critical pillar of the New Zealand economy.

Finance Minister Grant Robertson is overseas, so Associate Finance David Parker, who has an interest in monetary policy, stepped in for him at Question Time.

National’s Finance spokesperson, Nicola Willis, asked him if he considered fiscal and monetary policy decisions in the past two years “have in any way exacerbated the cost of living crisis; if so, how?”


Parker rejected the assumption in the question, but he did so with what appeared to be a concession that the Bank may have been preoccupied with employment.

“This was a time of considerable uncertainty, with unemployment forecast to reach significant levels,” he said.

“I consider our economic response has been instrumental in the record low levels of unemployment we now have.

“If we did not provide that support, the economic consequences for New Zealanders were dire.”

It’s a view that has been echoed in a number of tweets by former Reserve Bank board member Chris Eichbaum.

In one, he approvingly quoted noted American economist Alan Blinder, who said, “a central bank that decides to concentrate exclusively on price stability is, in effect, throwing in the towel on unemployment.”

At the heart of the Reserve Bank’s response in 2020 was a series of bleak unemployment forecasts.

In its February  12, 2020, Monetary Policy Statement, published before New Zealand’s first Covid case,  it forecast unemployment to move only very slightly above the the-then level of four per cent to reach 4.3 per cent by March next year.

But only four weeks after that statement was published, with eight confirmed Covid cases, on March 17, Finance Minister Grant Robertson unveiled a $12.1 billion economic package, the largest in the world on a per capita basis, including the wage subsidy.

“We don’t yet know what the full impact on New Zealand’s economy will be. However, we do know it will cost us jobs and have a significant impact on business,” he said.

The Reserve Bank was equally uncertain.

On March 16, Deputy Governor Geoff Bascand said the situation around Covid was evolving rapidly, and there was much uncertainty.

Nevertheless, the Bank decided to delay the start date of increased capital requirements for banks by 12 months – to July 1, 2021.

“We are taking this action now to help support lending in the economy at a time when there is a lot of uncertainty,” he said.

“Deferring the capital framework implementation provides banks with significant capital headroom.

“We estimate that this headroom will enable banks to supply up to around $47 billion more lending than would have been the case had the decisions been implemented as planned.”

A week later, on March 23, the Bank’s Monetary Policy Committee decided to implement a $30 billion Large Scale Asset Purchase (LSAP) programme.

“Returning inflation and employment to target over the medium term will require support from monetary policy,” the Committee’s minutes said.

“How much stimulus will depend on how the Covid pandemic progresses and the actions to abate the virus.

“The committee considered a range of scenarios, and it was apparent that in light of the evolving situation, more stimulus was needed.”

Thus by the end of March, the Bank had enabled an additional $47 billion to stay in the economy while it injected another $30 billion from its LSAP programme.

All the while this had been going on, the Reserve Bank had also dropped the Official Cash Rate.

It was already low – one per cent – when Covid struck, but the Bank reduced it to .25 per cent.

It is this avalanche of money – plus subsequent additions to the LSAP programme — plus the reduced interest rates that is at the heart of the debate now about whether the Bank went too far.

They were certainly grim times.

On April 13, Treasury released a series of “scenarios” for how Covid might impact the economy and forecast that over the next three years, unemployment could range between 8.5 and 22 per cent.

Robertson has often referred to those scenarios as what the Government was trying to avoid.

He told POLITIK last year that they lay behind the Budget 2020 decision to increase the Covid Response and Relief Fund to $50 billion.

And though the money obviously kept unemployment down, it had other potentially devastating effects on the economy.

Between March 2020 and March this year, the Reserve Bank house price index rose by 40 per cent.

From the end of 2020, consumer price inflation took off.

But unemployment never got to the heights that Treasury had feared it might back in 2020.

And that is where the Government rests its political case.

“If we did not provide that support, the economic consequences for New Zealanders were dire,” Parker said yesterday.

“In all likelihood, the households still managing the inflationary impacts of global energy prices now, many of them would also be out of work.”

Wilkinson believes that the Bank now has a formidable job in trying to tame inflation which it can do only by keeping interest rates high and forcing a slow down in the economy, which will have its own employment consequences.

“It (the RBNZ) should not have been so aggressive in reducing rates and buying bonds in the first place, and in having done so, it should have announced in the first half of 2020 a clear and credible plan for reversing its emergency excesses,” he told POLITIK.

“That could be clear in terms of timing or clear in terms of what observed outcomes would trigger its reversal. 

“The absence of a clear determination to restore normality invites people to think that it does not really want to.

“In a nutshell, as in our paper this week, central banks widely got half a dozen things wrong, in varying degrees, and our RBNZ was amongst them. 

“They were playing with fire and got caught out.”

Though high rates of unemployment are never good for politicians facing an election, nor is inflation.

The same polling company which works for New Zealand Labour, Talbot Mills, also worked for the Australian Labor Party in the recent election there.

They found there that “cost of living” was the biggest single issue worrying voters.

The problem with inflation for a politician is that it affects everyone, whereas unemployment tends to affect only those who are unemployed.

The political implications of that may be the real long Covid.