The Reserve Bank and the Finance Minister
By Richard Harman (author)
Reserve Bank Governor Adrian Orr yesterday defined the vision he has for the Bank as it confronts a new governance structure.
In a speech to the Financial Services Institute of Australasia, Orr likened the Bank to the Maori deity, Tane Mahuta.
“We use the Māori legend of Tāne Māhuta to tell the story of the Reserve Bank. Tāne Māhuta – the god of the forest and birds – separated the earth mother (Papatūānuku) and the sky father (Ranginui) so that the sun could shine in and life could flourish,” he said.
“Thereafter, Tāne Māhuta served as the kaitiaki (guardian) of the forest ecosystem – protecting it against threats, and enhancing the wellbeing of everyone within it.”
And so the Bank is to play a kaitiaki role within the New Zealand economy, specifically within the financial system.
But there was a subtext running through the speech in which Orr addressed a growing perception that the changes to the Bank's governance structure --- both the recent ones and another set currently being consulted on --- will have the effect of reducing the authority of the Governor.
Orr said the new Monetary Policy Committee which replaced his role as the single determinant of the Official Cash Rate had now made two decisions.
“There has been some talk in the context of these new arrangements that I am no longer the single decision-maker,” he said.
“ In reality, whatever the legislation says, I probably never was.
“ I always worked with others to make the final decision.
“This is now formalised, and I value the insights that all members of the MPC bring to their important role.”
The Government is reviewing the Bank’s prudential operations but has already decided those activities along with the Bank’s other non-monetary activities will be overseen by a new Board of Directors.
“The Board will set the strategic direction and risk appetite for the Reserve Bank,” he said.
“Like any board, it will be responsible for the Reserve Bank's decisions and actions but will delegate the exercise of many of its functions and powers to the Governor and the management team, and empower them to manage the Reserve Bank.
“The new governance Board could also take on the responsibility of overseeing our spending decisions and exercising appropriate accountability for our activities and our use of public resources.”
But though the decision to establish the board has been interpreted as an erosion of the Governor’s power, the other Government decision; to not separate out prudential supervision of the banks into a stand-along body like Australia’s prudential Regulatory Authority has been seen as something of a victory for the Bank.
“This makes sense given New Zealand’s size," he said.
“ However, this regulatory model is not just about being cost-effective.”In our story of the Reserve Bank as the Tāne Māhuta of New Zealand's financial system, our money and foreign reserves are the sap, and our payment and settlement systems allow money to flow around the system, and support our regulated financial institutions – our grafted branches.
“Keeping prudential regulation and supervision in the same institution as monetary policy, currency issuance, our payment and settlements systems and our markets functions, means we maximise the synergies between the different areas. “
Orr said the Bank’s key stakeholder was the Minister of Finance.
And he ventured into controversial waters at that point by acknowledging that the Ban needed to take notice of government policy.
“To get the best out of that relationship, we need to continue to understand government priorities and our contribution to the broader economic wellbeing of New Zealanders, " he said.
“But we also want the Minister to understand and support our objectives, respect the Reserve Bank for its advice, and hold us to account for our performance.
“Our role is to make sure the Minister has the information he needs to do that.
“This is also means working closely with the Treasury who will be acting as a monitor on the Minister's behalf."
Orr’s speech is the first real acknowledgement that the various changes made by the current Government have challenged the almost monastic independence of the Reserve Bank.
However they don’t go nearly as far as deputy Prime Minister, Winston Peters tried to claim
Peters told Radio NZ on Tuesday the Government had affected the value of the New Zealand dollar by announcing a changed perspective on how it would regard the currency, as opposed to the previous Government.
"The previous government wouldn't move a muscle when the dollar was so bad for exporters," he said.
"We've been prepared to say, 'no, no, we're going to look at the Reserve Bank Act', and we've sent a clear signal we're not going to put up with a dollar that's disruptive to our export markets and New Zealand's export-created wealth."
the challenge for Orr will be to maintain the perception that the Bank is acting independently regardless of the claims of Peters.