Inflation has been too high for too long, the Reserve Bank board should go – Richard Prebble
Regardless of who wins on Saturday, on Monday the country will need a new Finance Minister.
Nicola Willis is a list MP. The polls indicate National will win no seats for party list MPs.
The new Finance Minister will face a challenge no one foresaw.
This has been a cost-of-living election. Voters can dismiss the politicians they blame for inflation. But they cannot vote out the institution Parliament made responsible for controlling it.
How to hold the Reserve Bank accountable?
Last week, the Reserve Bank forecast inflation would reach 4.4% by Christmas, well above its 1 to 3% target. Then it held the Official Cash Rate at 2.75%.
BNZ economist Stephen Toplis was “frankly flabbergasted”.
He said the bank had added to inflationary pressure by encouraging an already weak New Zealand dollar to fall further.
The Monetary Policy Committee voted four to three to hold the rate. Reserve Bank Governor Anna Breman, Carl Hansen, Prasanna Gai and Rebecca Williams voted to hold while Paul Conway, Hayley Gourley and Karen Silk voted to hike the rate.
I have over 200 years of accumulated director experience and have spent countless hours on committees.
The chair is usually the most experienced and wisest. It is rare to even have a vote. Occasionally there is a dissenting member, often me.
But when a committee divides evenly and the chair’s vote determines the outcome, something is seriously wrong.
Breman is a new Governor. She must have impressive qualifications and interviewed well. Hopefully she did her homework.
Politicians created an independent Reserve Bank because they could not bring themselves to make unpopular interest rate decisions.
To remove politics, the bank was given a single target: keep inflation between 1-3% over the medium term.
Very clear. Or is it?
The words “medium term” have never been defined in legislation. The bank interprets them as somewhere between 18 months and three years.
That gives the bank permission, in its own judgment, to allow inflation to exceed 3% for years.
The justification is that interest rate changes take time to work through the economy.
But how do 18 months become three years?
Worse, the medium term appears to always be 18 months to three years from now.
Breman has been in office for 11 months. Inflation has been over the target the whole time.
Inflation was 2.5% in the year to March 2025. It has been rising since. It reached 3% in September 2025 and 3.1% by December.
All before the Iran war.
Meanwhile, the previous Governor departed in controversial circumstances and Breman was appointed.
At her first Monetary Policy Committee meeting in February, the decision to hold interest rates was unanimous.
Two days later, Breman declared: “We are confident that inflation will return to the 2% target midpoint over the next 12 months.”
Instead, by June inflation was 4.1%.
The bank could not have predicted US President Donald Trump’s attack on Iran and the resulting oil shock.
But inflation was rising before the war.
At the May meeting all three internal Reserve Bank members voted to hold, to do what the boss does, while all three external members voted to increase interest rates.
Breman then used her casting vote to hold.
Twice in six months the Governor has held rates.
Since May the bank has raised rates twice. Yet last week, with inflation forecast to reach 4.4%, the Governor’s vote held rates again.
Meanwhile, Australia’s interest rate is 4.85%, Britain’s 3.75% and America’s 3.75 to 4%.
New Zealand’s is just 2.75%.
How likely is it that New Zealand, a small open economy, is right to have interest rates at 2.75% when Australia is 4.85%?
On August 21, the Kiwi was worth almost US60 cents. Today it is just over US56c, a fall of nearly 6% in 10 weeks. It fell again following the bank’s decision.
A weak Kiwi makes imports more expensive, including petrol. Monetary policy itself is adding to inflationary pressure.
Who is accountable?
The Reserve Bank is independent. No Finance Minister should dictate interest rate decisions.
But independence was never intended to mean freedom from accountability.
In its October annual report, the Reserve Bank board declared that the Monetary Policy Committee had adequately discharged its responsibilities for the year to June 2026.
It even described the committee as “well-functioning”.
Really?
When I was a minister, I discovered a state-owned enterprise trading while insolvent.
I could not dismiss the chief executive, so I dismissed the board.
The incoming Finance Minister cannot simply dismiss Reserve Bank directors for disagreeing with an interest rate decision.
But the minister can ask them to resign.
And that is my advice to the incoming Finance Minister. “If you do not want a cost-of-living election in three years’ time, get a new board.”
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