Reserve Bank Governor Adrian Orr said this week he was resigning from his role. Photo: RNZ
Over the term of Reserve Bank Governor Adrian Orr's tenure, two-thirds of the items tracked by the consumer price index (CPI) increased by an annual rate of more than the top of the bank's inflation target band.
Orr said this week he was resigning from his role, and was leaving with consumer price inflation at target and the economy in a "cyclical recovery".
But since he took the top job in March 2018, guiding the Reserve Bank tasked with keeping inflation between 1 percent and 3 percent over the medium term, there has been significant price inflation.
Some of this has been outside the Reserve Bank's control. Infometrics chief forecaster Gareth Kiernan calculated postage has increased by 15.6 percent a year since March 2018, as NZ Post has battled declining mail volumes.
Eggs have lifted 12 percent a year, in large part due to new rules about how hens must be housed.
Insurance was up 10.9 percent a year, largely due to changes in how international reinsurers view the risk of operating in New Zealand.
Spouting had the next biggest increase, up 9.6 percent a year, international air transport 8.8 percent, pet food 8.2 percent, housing construction costs up 7.6 percent a year and yoghurt up 7.3 percent.
Bread and cereals were up 4.9 percent a year, beer 4.8 percent, 91 petrol 4.3 percent, and cheese 4.1 percent.
"Perhaps the most telling thing? There are 156 rows in the spreadsheet," Kiernan said.
"About one-third of them increased by less than 3 percent per annum over the five-and-three-quarter year period we're looking at, leaving two-thirds that increased at an average rate higher than the top of the Reserve Bank's target band."
He said, as well as some of the big price increases being due to things outside the bank's control, some of the items that fell in price or did not move were also out of its sphere of influence.
"From the bank's point of view, that's why focusing on any one item is not helpful, and why they will often look at trimmed mean measures or similar to get a gauge of underlying inflation, in case the headline number is being skewed by some weird outliers."
Kiwibank chief economist Jarrod Kerr said it was for that reason, too, that it was "cheeky" for Orr to claim victory over inflation as he stepped down. "Seventy-five percent of the decline of inflation is on tradeable goods completely outside Reserve Bank control. But it doesn't matter how you get there so long as you get there."
He said Orr had been successful in requiring banks to hold more capital, which was helpful for financial stability.
But he said during Covid, the Reserve Bank had done too much to stimulate the economy, and too much to restrain it.
"The Australians managed to get through it all without a recession, the US managed to get through without a recession but we drove ourselves into recession and it was a recession driven by monetary policy."
Sharon Zollner Photo: RNZ / DOM THOMAS
ANZ chief economist Sharon Zollner said it was easy to criticise with the benefit of hindsight. "He had a very challenging time. Anyone going backwards could point out our forecasts were no better. I'm not throwing rocks from my glass house."
Kerr said it would be important that whoever took over from Orr had a focus on clear communications, including with media and the analyst community.
"There are opportunities across all of that to do it better."
Kiernan said key for the next governor would be ensuring inflation expectations remained about 2 percent and the broader price-setting behaviour reflected a belief that the Reserve Bank had regained its inflation fighting credibility and would keep inflation under control.
"Even with the projected tick up in inflation to 2.7 percent later this year, there must be a risk that businesses revert to a cost-plus mentality and, instead of looking for efficiencies and avoiding passing on higher costs where possible, as was particularly the case during the 2010s, go back towards the Covid mentality of simply putting up their prices. To be clear, I don't expect the latter will happen because demand conditions are significantly weaker than they were three years ago, but it's certainly something to keep an eye on.
"Outside the core monetary policy sphere, there's an interesting tension between maintaining and enhancing the stability of the financial system versus ensuring that regulatory requirements and associated costs don't act as an impediment on the banking system, the availability and cost of credit, and the economy's ability to grow.
"The Reserve Bank's prudential oversight prior to the Global Financial Crisis was clearly too light-handed, so I'm generally in favour of the direction in which things have been heading over the last 15 years, but working out what the appropriate level of risk is in the system is not a black and white question. Ultimately, if the taxpayer is going to be left to pick up some of the tab when things go pear-shaped, the bank has a duty of care to ensure that the risks to the taxpayer are reduced as much as is reasonably possible, and that the right incentives are in place so that banks don't go taking on more risk than would otherwise be appropriate."
Zollner said little would be likely to change until a permanent replacement was found, and there were other factors that could affect the picture, such as the bank's funding.
