A review of tenure of New Zealand Central Bank Chief – Graeme Wheeler…

Yesterday, this blog had posted about how the end of tenure of NZ central bank chief and date of elections in the country are happening at the same time this year.

In the post, I had highlighted the Croaking Cassandra blog which is a goto blog on NZ economy.  It is so nice really to read blogs from different countries. The blog is run by Michael Reddel who worked in the central bank for  many years. One wished we had similar people writing in India too.

In a new post, Reddel looks at the tenure of Graeme Wheeler which is a decent read. Earlier we criticized central banks for not able to lower inflation. Now the criticism is for not able to increase inflation:

I think Wheeler has done a poor job as Governor, both in the specific decisions he has made, and in the processes and procedures and style he has adopted.   For most of the time, he seems to have been aided and abetted –  or at least sheltered –  by the Board, who are actually paid as the public’s agents, not as associates and defenders of the Governor.

And it is not as if times have been unusually hard for him.  We haven’t had a recession in New Zealand and there has been no major flare-up of international financial stresses during his term (so far).  The terms of trade moved around a bit, but not much more so than usual.  There was no domestic financial crisis, no major domestic fiscal stresses, no change of government, and the major natural disasters of the last decade (the Canterbury earthquakes) had all happened by the time the Governor took office.   Sure, what is going on globally is a little hard to fully make sense of, but whereas most other advanced country central banks had by 2012 largely reached the limits of conventional monetary policy (interest rates very close to zero) that has not yet been a constraint here.

The Reserve Bank’s primary function –  according to the Act –  is monetary policy.  Graeme came into office with a new PTA that he was comfortable with –  in particular, with an explicit focus for the first time, on the 2 per cent midpoint of the inflation target range.  And yet over his 4.5 years in office, annual headline inflation has averaged not 2 per cent but 0.8 per cent.  Falling oil prices played a part in that, but CPI ex petrol has averaged not 2 per cent, but 1.1 per cent.  The Governor’s preferred measure of core inflation –  the sectoral factor model measure –  has averaged not 2 per cent, but 1.35 per cent.  All sorts of one-off factors that the Governor can’t be really be held accountable for influence inflation rates –  thus cuts in ACC levies have held down headline inflation in the last couple of years, while large increases in tobacco taxes have artificially boosted headline inflation throughout the Governor’s term.

There are a lot of comfortable commentators inclined to treat these inflation outcomes as a matter of indifference –  so what they imply, after all low inflation is better than high inflation.    But persistently low inflation over several years –  and especially when it doesn’t arise from surprisingly good productivity outcomes – almost invariably comes at a cost –  lost output, and lost employment.  And that has almost certainly been the case over the last few years.   Throughout the Governor’s term, the unemployment rate has been reasonably materially above estimates of the non-inflationary or “natural” level –  these days thought to be around 4 per cent.  The Governor’s choices affected the lives and options of real people –  and years lost out of employment simply can’t be got back.

My standard here isn’t one of perfection.  Central banks, engaged in active discretionary monetary policy of the sort now common around the world, will inevitably make mistakes.  Central banks try to operate on the basis of forecasts, and yet no one  –  least of all them  – knows the future.  So in evaluating the Governor, we need to look at the specific circumstances, and at the willingness to acknowledge and learn from mistakes.  Here, Graeme Wheeler doesn’t score well.


What was striking was Wheeler not eager to communicate effectively:

Effective communication is a big part of what the central bank governor should be expected to do, and the more so in New Zealand where (a) all the statutory power rests with the Governor personally, and (b) where the Bank has such wide-ranging powers, and is not just responsible for monetary policy.  And yet during the Wheeler years, the Bank hasn’t done well on that score either.    The number of on-the-record speeches the Governor has made has dwindled, and those he does give don’t typically compare favourably –  in terms of quality, depth and insight –  with those of his peers in other countries.   There have been specific communications stuff-ups (speeches inconsistent with subsequent action etc), although I’m reluctant to be too harsh on those –  most central banks end up with some of those problems in one form or another, at some time or another.  But it is also a matter of accountability:   Wheeler has been very reluctant to grant serious media interviews (none at all to the main TV current affairs programmes, and only belatedly the occasional soft-soap interview to the Herald) in a way that is quite extraordinary for someone personally wielding so much power.  A Cabinet minister wouldn’t get away with it.  And in his press conferences, the Governor has often come across as embattled, defensive and weary.    Despite his past senior roles, he had no background in the public limelight, and clearly wasn’t comfortable with it.  But that was a significant part of what made him, at least with hindsight, the wrong person for the job.

Neither in my time at the Bank –  around half his term, involved in most of key policy committees –  nor subsequently have I seen any sign in the Governor of wanting to foster a climate of debate and explorations of ideas and alternative options.  I mentioned the LVR controls already, but they weren’t the only example.  In my own experience, one small example lodged in my brain.  One day a few years ago Graeme was down in a meeting in the Economics Department and there was a bit of a low key discussion about alternative policy approaches etc: the death glare I received for even mentioning, hypothetically, nominal income targeting was a pretty clear message, not just seen by me, that what the Governor wanted was support for his position, and answers to his detailed questions, not alternative perspectives or debate, no matter how non-urgent the issues were.  People respond to incentives.  In a area so rife with uncertainty as monetary policy, it is very dangerous approach.  The same goes for the ability to deal with external criticism –  a capable and intellectually confident Governor would recognise the value in alternative perspectives and relish the prospect of engaging with the alternative ideas.  Doing so is part of how people come to have confidence in the Governor.  But there has been none of that with Wheeler –  if anything he seemed to become unreasonably rattled by disagreement (his active effort to tar the messenger who drew to his attention the OCR leak last year was a sad example of that –  made worse by the cover he received for it from his Board).

One could be reading similar pieces for current Indian central bank chief in future as well. However, it is unlikely that NZ media would have hyped the appointment as was done in India without any basis.

Though he praises Wheeler for trying to make things less Governor centric.

Nice bit..


3 Responses to “A review of tenure of New Zealand Central Bank Chief – Graeme Wheeler…”

  1. Anantha Nageswaran Says:

    One of Graham Wheeler’s speeches from 2014 on the limits of monetary policy is part of the macro economics course I teach here in Singapore at the SMU.

  2. Anantha Nageswaran Says:

    I am sorry it was from October 2015: http://www.rbnz.govt.nz/research-and-publications/speeches/2015/speech2015-10-14

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