Opinion: Adrian Orr’s crystal ball

Adrian Orr, Reserve Bank governor

The role of the Reserve Bank governor has always been one of a very conservative banker with a reserved persona. Think Don Brash or Graham Wheeler. The job description requires the governor to steady the ship, adopt a ‘no surprises’ policy, and take all necessary steps to protect the banking system and to keep the economy working and the money flowing.

Adrian Orr has decided to take a more ‘transparent’ approach. While transparency might be highly desirable in government, it is not always a good thing in the banking sector.

It does not take much to spook the markets. A slightly overstated company profit forecast and the share price drops 20%. Anything remotely negative (ANYTHING) and the market loses 5% of its value. That is everyone’s KiwiSaver and everyone’s investment portfolios. All forms of investment are affected.

So, when you have a Reserve Bank governor that thinks he is also psychic, you are in trouble.

Stuff reports: quote:

Adrian Orr’s latest move as Reserve Bank governor appeared to deliver something for everyone, at a time when the state of the economy is the subject of so much debate.

In suggesting that he would keep the official cash rate (OCR) at the record low 1.75 per cent until 2020, it appeared on one level to signal that the Reserve Bank was doing almost nothing, but the issue was up for debate.

At a time when business confidence is low, Ardern said Orr was talking about how “there is certainty for business looking to invest now, and he’s encouraging businesses to go out and do that”. end quote.

Do you not get the feeling that, at a time when business confidence is the lowest in a decade, he is supporting the prime minister’s belief that everything is fine really?

Because there is no such thing as certainty in economic matters.

Just cast your mind back 10 years to the start of the Global Financial Crisis.

Floating interest rates were at about 10%, and all the signs were that interest rates were going to continue their skyward path.

Then, there was Freddie Mac and Fanny Mae. Then there was the Lehmann Brothers. In the space of a few days, there were banking and insurance company collapses so bad that there were world leaders summits called in urgency.

Adrian Orr, however, has his own special brand of crystal ball and knows that everything is going to be super-duper from now until 2020.

No. He doesn’t. He cannot possibly know what will happen.

First of all, Turkey is having some serious economic problems right now. Things seem to have improved slightly, but that may be no more than a ‘dead cat’ bounce.

What if there is a war in the Middle East?

What if there is more unrest in Europe?

What if Brexit really turns to custard?

When he announced that there would be no increase in the cash rate before 2020, what happened?

The dollar dropped significantly.

Don’t tell me he didn’t know that might happen.

The right thing to do and the approach that most governors have taken in the past would have been to say that it is ‘unlikely’ that rates will change before the end of the year. Then, in early 2019, to say that rates will ‘probably hold’ until at least the middle of the year. Markets like medium-term certainty. It gives everyone time to breathe.

So, by saying that rates will not rise before 2020, Mr Orr is doing two things. He is pretending he knows what will happen in the world over the next year and a half.

And he is supporting the government’s head-in-the-sand position of pretending all is well in the economy, and that this is a great time to invest.

He is wrong on both counts but he seems to have forgotten one other, very important aspect of the role of Reserve Bank governor.

He is supposed to be independent. I’m not sure that his latest announcements show that he is independent of government influences. If a business goes and borrows $5 million to invest in machinery on the strength of Orr’s assurances and then their sales collapse due to a faltering economy, where does that leave our confidence in the Reserve Bank?

 


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Accountant. Boring. Loves tax. Needs to get out more. Loves the environment, but hates the Greens. Has been called a dinosaur. Wears it with pride.

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