Why we want the Reserve Bank to operate independently.
Minister of Foreign Affairs Winston Peters was wrong to criticise Governor of the Reserve Bank of New Zealand, Anna Breman, for cosigning a statement with 14 other heads of other central banks (plus two from the Bank of International Settlement). The statement expressed support for the principle of independence of central banks and solidarity with the Federal Reserve System and its Chair Jerome Powell.
The statement was
‘We stand in full solidarity with the Federal Reserve System and its Chair Jerome H. Powell. The independence of central banks is a cornerstone of price, financial and economic stability in the interest of the citizens that we serve. It is therefore critical to preserve that independence, with full respect for the rule of law and democratic accountability. Chair Powell has served with integrity, focused on his mandate and an unwavering commitment to the public interest. To us, he is a respected colleague who is held in the highest regard by all who have worked with him.’
Peters said that the RBNZ ‘has no role, nor should it involve itself, in US domestic politics’ and urged Breman to ‘stay in her New Zealand lane’ and focus on domestic monetary policy. He cannot have been fully aware that the heads of central banks belong to one of the most exclusive clubs in the world. Like many such clubs, most of the time it is about conviviality, gossip and respect, but during an international monetary crisis it really matters.
During the Global Financial Crisis there was a threat of international liquidity becoming totally jammed which would have meant exports, imports and international debts could not have been paid, and then, well who knows ... The club dealt with the threat by currency swaps which, in our case, enabled the central banks to exchange NZ dollars and US dollars, giving us the liquidity we required (although, as it happened, we did not have to use the facility). The personal knowledge and respect generated by the club meant the deals were done efficiently and quickly (‘instantaneously’ compared to most international negotiations). Those swaps unwound the potential monetary catastrophe.
So the statement was only tangentially about American domestic politics. It was about the international monetary system. Any domestic policy side was because the US dollar remains at the centre of both. Mind you, Trump seems to confuse the two. If there was a ‘domestic’ purpose of the statement, it was each governor signalling to their government not to get politically involved in operating a central bank (although Peters failed to get this point).
Breman is probably the newest member of the club; previously she would have been, as the First Deputy Governor of the central bank of Sweden, an associate member. By signing the statement, she affirmed her membership. (Peters would have had a justified gripe, had she unilaterally made the statement. There also seems to be an issue about when she advised her Minister of Finance of the signing; the ‘no surprises convention’ is so ministers are prepared when journalists raise a matter with them.)
It was not just a political decision. Breman personally and profoundly believes in the necessity of central bank independence. As do almost all New Zealand economists who recall the Muldoon years. The then Prime Minister and Minister of Finance, Rob Muldoon, had a practice of telephoning the Governor of the Reserve Bank (as well as the chief executives of the commercial banks) directing them as to what their interest rate settings should be.
A political dimension is very disruptive to money markets, which have to make complicated decisions about the future. Such uncertainty leads to higher interest rates which really reflect the poorer efficiency of the resulting monetary system.
That is why in the 1980s, after Muldoon lost power, the Reserve Bank of New Zealand was given statutory operational independence. Nowadays, the government sets its objectives and leaves the operational pursuit of those objectives to the Bank’s expertise and judgement. The government may only communicate its requirements in writing which is tabled in Parliament. (Such is the statutory rigour that Ruth Richardson relates in her memoir that when she was Minister of Finance, she got a legal opinion as to whether she could dine with Governor Don Brash – they were old friends; he was appointed to the position before she became minister.)
Other central banks will have slightly different arrangements to ensure their independence. (The American Federal Reserve Board, for instance, has a majority of members not appointed by the President.) One can support the principle of an operationally independent central bank without agreeing to the objectives it has been given or to the judgments it makes applying them. (Because these are technical issues, politicians tend to be more personal in their criticisms.)
The point is that politicians – including Muldoon and Trump – are not competent to make those judgements, any more than they are competent to fly a plane. It is you, the passenger, who target your destination by your choice of plane; the pilot operates gets you there. (Coupling Muldoon and Trump does not mean they behave similarly, although both have a penchant for interest rate controls. Muldoon’s directions were for short-term electoral gain, never for personal aggrandisement.)
Once it was claimed that the Reserve Bank Governor was the most powerful man (as he was in those days) in New Zealand, confusing the destination and the piloting. The nonsense ended when Governor Brash stepped down to go into Parliament with the ambition to be prime minister.
I suppose Peters made his criticism partly because he thinks he has to keep reminding us that he is in charge of foreign affairs (although he is subject to collective Cabinet decisions). Additionally, Peters – and everyone else – is anxious that New Zealand does not to come to Trump’s attention; keeping a low profile helps. That is a sensible judgment given that Trump bullies everyone and the smaller you are the easier it is to bully. However, Breman was low on the list of signatories. (That may reflect her assenting at 3am, presumably a little sluggishly.) Given Trump’s notorious lack of focus, he would have given up reading the statement before he got to her name. He is probably much more concerned with the criticism of the chief executive of JP Morgan whose line was similar to the central bankers’ statement. Clinton adviser James Cargill, said that if there was reincarnation, he wanted to ‘come back as the Bond Market. You can intimidate everybody.’