Covid response: Central banks made ‘serious’ mistakes, says former RBNZ Governor Graeme Wheeler


Graeme Wheeler, former Governor of the Reserve Bank. Photo/Mark Mitchell

Former Reserve Bank Governor Graeme Wheeler said central banks made serious mistakes in the wake of the Covid-19 pandemic which now need to be recognized and corrected.

In a new research paper co-authored by Bryce Wilkinson for the New Zealand Initiative, the pair strongly criticizes the accommodative monetary policy and quantitative easing that has taken place and which they say has been the main driver of the ‘inflation.

The paper argues that central banks were overconfident about their monetary policy framework; were overconfident in their role models; were too convinced that they could control production and employment.

This suggests that they lost their focus on price stability and took on too many mandates.

He also argued that they faced conflicts in some cases with conflicting “dual mandate” goals; and have been distracted by foreign political goals, such as climate change.

The report refrains from directly attacking the RBNZ but makes very specific criticisms and refers to the local bank.

For example, the Reserve Bank of New Zealand Act was amended by the Labor government in 2018 to create a dual mandate, adding employment as a policy objective.

“The RBNZ is responsible for maintaining a stable general level of prices over the medium term and supporting a maximum of sustainable employment,” the document states.

He also argues that central banks have diverted their eyes from the ball with broader policy initiatives – a point he illustrates by highlighting the work of the RBNZ integrating a Maori worldview into its outlook.

“Confident in their ability to keep inflation low, central banks have in recent years
began to divert resources to other topics such as climate change and inequality (and in the case of the RBNZ, also embracing New Zealand’s indigenous history and culture and embracing a Maori worldview in central bank operations),” the report said.

“These issues have little or nothing to do with why central banks exist.
– ensure price stability and financial stability.”

Central banks now had to ensure that they had “world-class financial market expertise in their monetary policy committees and councils. further damage the credibility of a central bank,” the report said.

Central bankers had to learn from their mistakes in judgment because “the social, economic and political consequences of major mistakes are profound and the public’s confidence in them can be easily exhausted.”

In a podcast produced by the NZ Initiative to accompany the article, Wheeler says he thinks central banks “have made serious errors of judgment in the conduct of monetary operations”.
policy over the past two years.

“We have inflation at its highest level in 40 years, and if you look at the US over the last two years you’ve had 14% inflation, 12% in the UK.”

“Now some central banks have suggested it was due to damaged supply lines due to Covid restrictions for example. Taiwan’s microprocessor shortage, for example, or it was due to the Russian invasion of the ‘Ukraine and the impact on energy, wheat and fertilizer prices.

These are factors that have affected inflation, he said.

“But they are by no means the main drivers of inflation.”

The economic and financial consequences of central bank errors will be severe and felt around the world, Wilkinson said.

“The poorest and most vulnerable will be hardest hit by monetary policy mistakes.”

Wheeler, who served as Reserve Bank governor from 2012 to 2017, acknowledged mistakes were made during his tenure that he now regrets.

The RBNZ raised rates three times in 2014 and then had to reverse those moves.

“[I’m] aware that you know that if you live in a glass house, you should not throw
stones, but I’m very keen to collaborate with Bryce on this paper because the mistakes that have been made by central banks are so serious,” he said on the podcast.

Since 2017, Wheeler has been an independent non-executive director on
large companies in Zurich and Beijing. He also writes on global economic policy issues.

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