Reserve Bank of New Zealand Should Lose the Hubris
(Bloomberg View) -- There are big changes at the Reserve Bank of New Zealand, most of which are welcome. The new governor should consider another break with the past: Drop the hubris.
Adrian Orr, who took the central bank's helm last month, is to explicitly aim for maximum employment as well as price stability. That’s a break from the previous regime that formally focused on combating inflation. Another breakthrough is setting interest rates through a monetary policy committee instead of having the governor solely responsible.
In some ways, the changes merely bring the central bank into the global mainstream. A broader array of opinions is generally a good thing, lest an institution succumb to groupthink. New Zealanders love to point out that they pioneered inflation targeting three decades ago. They fell behind on the rest, but they want you to know that now the central bank is all caught up!
Almost. Here is where the hubris comes in. In a stunning “It can't happen here” moment last weekend, Orr bemoaned banking culture in Australia and talked about how superior things are in his country. (Australian banks are taking a public-relations beating in a royal commission — kind of a judicial inquiry — that's revealed misconduct such as a charging a customer fees long after they died.)
The problem for Orr is that New Zealand banking is, in essence, a branch office of Australia. Australia’s four biggest banks together hold about 90 percent of deposits in the New Zealand financial system. Two of the bosses of those big four Australian banks have strong roots in New Zealand. Shayne Elliott, chief executive officer of Australia & New Zealand Banking Group Ltd., is a kiwi. Andrew Thorburn, CEO of National Australia Bank Ltd., once ran NAB’s subsidiary in New Zealand.
The subsidiaries have separate boards and are regulated locally, but the economies and financial systems of the two countries are intertwined. Can Orr really be so categorical?
It’s imprudent, to put it charitably, for Governor Orr to suggest that somehow an Australian virus hasn’t crossed, or won't cross, the Tasman Sea. And yet he says it. “The true problem and challenge going on in Australia is cultural,” he said in an interview on Television New Zealand’s Q+A. New Zealand bank culture “is infinitely better than some of the activity you’ve seen in Australia,” he said.
Orr went on: “Why search for a problem yet to be identified? I don’t see any lack of confidence in banks in New Zealand.”
Plenty of central bankers misspeak or make comments that come back to bite them. It’s part of the job. Former Federal Reserve Chairman Ben Bernanke infamously said in 2007 that the problems of subprime mortgages were “contained.” Wim Duisenberg, the first president of the European Central Bank, was vilified for resisting rate cuts by saying “I hear, but I do not listen.”
Orr has been in office less time than Bernanke or Duisenberg had been when they made those comments. He does get some understanding for a rookie mistake. For now.
It would be a shame to go down the route of Orr’s predecessor, Graeme Wheeler, who wrote to the CEO of a bank to complain about an economist whose work he took umbrage to. Wheeler just ended up looking petty and needlessly defensive.
Orr takes the reins of an institution that’s undergoing significant changes. I wish the central bank well and hope Orr is right that banking shenanigans are … contained. If they aren’t, he may come to regret his public certitude.
Daniel Moss writes and edits articles on economics for Bloomberg View. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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