After Covid criticism, RBNZ governor Adrian Orr must not overcorrect

The RBNZ forecasts inflation peaking at 7 per cent in the second quarter of 2022, well above its target of between 1 per cent and 3 per cent.

This week, New Zealand saw the remarkable spectacle of the governor of the Reserve Bank under fire from his immediate predecessor for failing to get on top of inflation.

With inflation running at 7.3 per cent, well above the RBNZ’s target range, Adrian Orr’s record over the course of the pandemic has been under the microscope for months – with criticism coming not only from former RBNZ leaders, but from most parties in parliament, as well as commentators on both the left and the right.

That criticism reached a fever pitch this week when former RBNZ governor Graeme Wheeler released a research paper authored with Bryce Wilkinson of right-wing lobby group the New Zealand Initiative.

The paper tore into central bankers around the world for their role in stoking inflation during the pandemic – accusing them of being wildly overconfident in thinking monetary policy could stimulate the economy without causing inflation.

Graham Wheeler, former governor of the RBNZ

Wheeler is not the only former senior RBNZ figure to criticise Orr’s pandemic performance – former governor Don Brash has been a critic for some time, and former RBNZ chairman Arthur Grimes unloaded as well, saying there was a lack of knowledge in the bank about how to run monetary policy.

The opposition National Party was quick to join the chorus of criticism – calling for the government to establish a properly independent review. The party’s leader, Christopher Luxon, argued that given the “tidal wave of cash” unleashed by the RBNZ’s quantitative easing and bond buying programs, New Zealand couldn’t afford to let the bank “mark its own homework.”

Under the gun, Orr issued a rare statement acknowledging the bank’s actions during the pandemic had contributed to inflation and pointing to recent steep rises in the official cash rate as evidence of a change in direction.

Finance Minister Grant Robertson, while being careful to point to the independence of the RBNZ, stepped into the debate labelling Luxon “Captain Hindsight” for now becoming an inflation hawk despite calling for even more spending to support businesses during 2021.

Putting the political sniping aside, Robertson makes a point worth acknowledging – like other central bankers around the world, Orr was faced with a hellish decision in 2020.

After years of lower than average interest rates, was it safe to unleash record levels of monetary stimulus to get the economy through pandemics and lockdowns without overheating the economic engine?

At the time, the vast bulk of opinion amongst economists and forecasters was that all the economic risks were on the downside – economies battered by the pandemic were thought to be much more likely to be at risk of mass unemployment and record business failures than they were of overheating. Fear of a second Great Depression was rife.

Orr, like others, took the “path of least regret” – arguing that an economic crisis with mass was an even worse outcome than inflation.

In short, the bet was, that as bad as the 1970s were, you’d take them over the 1930s any day.

And it’s worth remembering that at the time, the scientific consensus was that a vaccine for Covid-19 was likely to be years away.

Previous coronaviruses had proved exceptionally difficult to vaccinate against.

That meant plenty of experts were forecasting years of closed borders, catastrophic death rates, shuttered businesses and declining global trade.

It’s perhaps a little too easy to sit in 2022, safely ensconced in the reopened, safer world the vaccine miracle has gifted us and forget the long decade of horror we were facing down before science delivered us.

That’s not to say there aren’t real questions about how long Orr kept the monetary accelerator to the floor, even after it became clear that the vaccine would work and things would reopen much faster than anticipated. The argument for some sort of eventual review of New Zealand’s Covid-19 response, including the economic response, is very strong. In an increasingly globalised world, it’s unlikely this will be the last major pandemic we face.

The problem though, is that the pandemic is still very much part of our lives. With China still imposing massive lockdowns, global supply chains still blocked, and tens of thousands of New Zealanders off sick every day, we’d be kidding ourselves if we thought we were through the economic consequences of the virus.

And this is where there is some concern that, having been arguably slow to hit the monetary brakes, Orr may now risk overdoing the response. After all, hiking interest rates does nothing to make it easier to get goods through the ports or help businesses whose staff are sick.

Having faced considerable criticism for the first part of his pandemic response, Orr must not make the mistake of correcting too far back in the other direction.

Hayden Munro was Jacinda Ardern’s campaign manager for Labour’s 2020 election win. He now works for Wellington-based firm Capital Communications and Government Relations.