Face of the Day

When Orr assumed office, in late 2017, inflation was under two percent and had been for decades. This country paid heavily to defeat the spiral of price rises that were created, in part, by expectations. If firms and employers believe inflation will run at ten percent, they raise prices and wage demands to remain parity.

In the years prior to 1989 the Reserve Bank was a government department. There was a well-established ruse. The minister of finance would promise to run a tight monetary policy while secretly printing cash. [...]

To prove the Reserve Bank could be trusted New Zealand, in 1989, made the Reserve Bank independent from the Minister of Finance and we placed the incomparable Dr Don Brash in charge.

Brash’s remit was price stability; not re-election. If inflation was too high he’d be made to walk the plank. He didn’t care how many orphans were tossed onto the street if it meant inflation was below two percent; at least that is what he made us believe. Once the public understood the incentive structure of the Reserve Bank had changed, inflation fell from around fifteen percent in the late 1980s to one percent by the early 1990s with the minimal impact on the housing arrangements of orphans.

This was the legacy that Orr inherited. He was the custodian of that reputation; this nation’s most sacred economic taonga.

And he thrashed it. [...]

By mid 2019, well before the Wuhan virus made its break for freedom and while inflation was well in its box, Orr began loosening monetary policy; cutting the OCR. Twice.

Once the pandemic hit Orr stepped up; placing an emphasis on maintaining employment and began quantitative easing. We were producing less while the Reserve Bank flooded the economy with cash.

Inflation was the inevitable result but that wasn’t Orr’s critical lapse of judgement. It was standing shoulder to shoulder with Grant Robertson, economically and on occasion physically, bankrolling Ardern’s Covid response with fifty-three billion of new money and negative real interest rates.

In the space of a few months in 2020 Orr eviscerated the public’s confidence that the Reserve Bank was really independent; he confirmed that a governor could, and in his case would, prioritise the economic agenda of the minister of finance ahead of price stability.