Central Bank Independence?

I have never understood why the independence of the central bank (in our case, the Reserve Bank) is thought to be so important and beneficial. The practice – and doctrine – were pioneered in New Zealand, and hark back to the era of Rogernomics, monetarism and the priority given to controlling inflation. Today, they reflect outdated views about the infallibility of markets and the weight to be placed on, and mechanistic nature of, monetary policy.

But it was always essentially anti-democratic in nature and purpose; its effect has been to remove from parliamentary scrutiny, and therefore democratic control, the most important areas of government policy and action. Quite why this was thought to be necessary and why we were urged to trust the Reserve Bank, freed as it was from public scrutiny, to decide these important policy issues has never been clear to me – particularly when the Governor of the institution, over a significant and critical period of its operations, demonstrated repeatedly that he had no understanding of how money is created.

And furthermore, the Reserve Bank is, as its name demonstrates, a bank; its loyalty is to the banking system, and it views the economy from the viewpoint of a bank. Its principal goal and responsibility is to maintain the viability of the banking system; having established the framework that it sees as necessary, it is then content to leave what it sees as subsidiary issues (that are nevertheless important to the rest of us) to elected politicians.

It has of course been flattering to bankers and economists to have it established that some issues can and should be decided only by them, because they are too important and difficult to be left to politicians but, if that were accepted, we might as well give up all claims to be a democracy. In fact, it is hard to see why – in the light of all the complex issues that our governments have to decide – it should be only these fundamental economic issues that are to be withdrawn from their remit and handed over to unelected, and supposed, experts.

So, why should politicians themselves have fallen into line and supported a doctrine that runs so much counter to their own responsibilities? We can only surmise, but my best guess – as a former politician myself – is that they found it quite convenient to shuffle off the responsibility to another body. It was handy for a Minister of Finance, under hostile questioning in Parliament. To be able to say that the issue was nothing to do with him (or her).

It is in the light of these ponderings that I view the recent discussion as to whether Grant Robertson, in asking Adrian Orr to consider unemployment and house prices when deciding monetary policy (principally, interest rates), has somehow crossed a sacred line.

I can only say that I think we should be grateful that we at last have a Minister of Finance, and a Governor of the Reserve Bank, who have an accurate understanding of their respective roles. Welcome back, democracy!

Bryan Gould
2 May 2021