Reserve Bank's 'Adrian Orr show' hurting the economy: Economist

Monday, 7 October 2019

Reserve Bank governor Adrian Orr is taking a strong stance against Aussie banks.

A celebrity Reserve Bank governor is a shock to New Zealand businesses, a University of Auckland economist says.

Robert MacCulloch said new governor Adrian Orr was a significant change from previous governors of the central bank, and that could have a negative effect on business confidence.

He said he felt Orr had changed the role from a serious office to one that catapulted him to some sort of national celebrity, which went against the traditions of the Reserve Bank.

'The central bank is a critical organisation in our country and there's decades of tradition, extremely precious tradition, of trying to ensure the central bank is independent of political pressure and influence and from vested interests.

**READ MORE:

Adrian Orr might get away with being a 'celebrity governor' until he gets a call wrong, one economist says.

* 'Nothing's too big to fail', warns Reserve Bank governor Adrian Orr

* Welcome to the new normal: low to no interest rates

* Reserve Bank predicts NZ economy will pick up, despite global concerns**

'There is a view built over the decades that has worked very successfully in my view… that the central bank governor should be conservative, choose words carefully…

'The idea was this is an organisation that has the serious business of setting interest rates and banking regulation. It needs boring but boring in a good way type of people.'

The bank's recent 50 basis point official cash rate cut, to 1 per cent, had been a risky move, MacCulloch said.

'You have to be extremely careful that sort of decision doesn't backfire.'

He said, if the bank said it was cutting rates drastically to boost the economy, some people would take it to mean it was very worried about the economy.

That could stop businesses investing, which could lead to further declines in business confidence.

MacCulloch said the US Federal Reserve had been careful to pitch its recent cut as coming as part of a solid economy.

Orr was not available immediately to comment for this story.

But other economists were not as concerned.

Cameron Bagrie, of Bagrie Economics, said he thought the bank had good intent behind its 50 basis point cut.

'If you think you need to do it then get it done. But I think they miscalculated how much it would spook businesses and savers.

'We don't normally think too much about the impact lower interest rates has on savers but that side of the ledger is very nervous at the moment. Their savings nest egg doesn't look great in the current interest rate environment.'

Infometrics chief forecaster Gareth Kiernan said unexpected and aggressive cuts this year were not warranted because the central bank's efforts to stimulate the economy were unlikely to be effective.

'The bank would be better waiting in case of a sharper downturn in the economy before cutting to make sure that it's got some ammunition left in reserve. However, the bank's decision to act almost pre-emptively could still turn out to be the right one if we've underestimated the extent of the current slowdown.

'I don't think the bank can be criticised yet for unnecessarily shocking the market. There's been some speculation that recent drops in business and consumer confidence are due to people becoming more worried about the economic outlook because of the Reserve Bank's actions, but it's difficult to be certain about the link. I do know, however, that the bank was a bit grumpy about media speculating that maybe the economy was really falling apart and the bank knew something that no one else did.

'Robert MacCulloch's criticism saying that Adrian Orr wants to be a celebrity governor reminds me a bit of the situation of Billy Bowden, the cricket umpire. From time to time, he received a lot of flak for being overly flamboyant and drawing too much attention to himself. That sort of thing doesn't matter if you're getting the critical decisions right, but as soon as you get one wrong, it's easy for people to be critical and say that you weren't focusing on your core job.'

There was little attention paid to the Monetary Policy Committee or the Reserve Bank board, by contrast to the focus on Orr, MacCulloch said.