Danyl McLauchlan: The case for an independent central bank

These banks have the power to inflate away the value of our incomes and life savings, then bring inflation down again by plunging the economy into a deep recession, costing people their jobs, businesses, homes. And they do all this outside any mechanisms of democratic control. The government cannot direct the bank, although we recently learnt the prime minister regularly gives his reckons to the monetary policy committee, who are surely dazzled by his observations that interest rates should be low and credit should be cheap.

In New Zealand there’s a single-word explanation for this undemocratic model: Muldoon. He pressured the bank to lower interest rates in election years, making mortgages and loans cheaper, speeding up the economy, pushing up wages. The consequence was high and sustained inflation – it hit 18.4% in 1980. In comparison, the post-Covid price surge never went above 7.3%. Muldoon is the poster child for independent central banking, proving that regulating the money supply is too important to be left to politicians. We empower the technocrats on the condition they remain scrupulously apolitical and publicly accountable for their actions.

National and Act did not feel governor Orr was apolitical. They took umbrage at his promotion of climate change and progressive interpretation of the principles of the Treaty of Waitangi as core business for the bank during a time both were contentious issues.

There are still grave reservations about the RBNZ’s judgment during and after Covid, and Orr did not welcome scrutiny of his enormously consequential decisions, bristling with indignation when challenged by journalists and opposition MPs. After he stood down from his role without any explanation, the bank’s chair declared Orr resigned for “personal reasons”. No one believed this.

After a six-month media battle to drag the truth out of the nation’s most powerful financial institution, it emerged Orr had clashed with Finance Minister Nicola Willis and Treasury officials about the bank’s budget. He’d stepped down a week before his departure was made public.

It also became apparent Reserve Bank chair Neil Quigley had fought a vigorous campaign to prevent any of the background being made public. Willis was aware of all of this but chose not to disclose it, and kept Quigley on as chair until it emerged in the media. Her office claimed Quigley had chosen to hand over to a new chair “having overseen a number of key workstreams for the bank” – a second misleading press release to address the consequences of the first.

There’s a critique of independent central banking that has circulated on the left for many years and is gaining credibility among the new right as Donald Trump takes on the independence of the US Federal Reserve.

This argues that central banks symbolise everything that’s wrong with modern political economies. Decisions that should be made by elected politicians have been placed beyond democratic accountability. Instead they’re made by economists who are allegedly impartial but have their own ideologies and agendas they advance beyond a veneer of neutrality. They work in concert with other central bankers around the world against the interests of their own citizens, prioritising price stability and currency value over more egalitarian goals like full employment or higher wages for workers. Elections and political debates merely deliver the illusion of democracy.

This critique is probably wrong: we’d be better off with Orr on a bad day than if Chris Hipkins or Christopher Luxon could game the macroeconomy for their own political interests. But this culture of imperious secrecy around the bank is not encouraging. People will believe the bank is malevolent if its leaders behave like villains. And the government’s near total powerlessness in the economic sphere is striking. It is desperate to be seen to be doing things without doing anything.