In today's email we profiled the next Reserve Bank Governor, Adrian Orr.
1. Robertson gets his top pick
Grant Robertson was clearly delighted yesterday that Adrian Orr will be the next Reserve Bank Governor, and so were the financial markets and the business community.
Orr is seen as both sympathetic to the new Government's reforms and popular in the markets -- a rare combination.
He is an outsider with the authority and track record of successfully running a large organisation with a big balance sheet (the NZ Super Fund manages $37.2 billion) who can 'clean house' and enact reform. But he's also an insider with the experience of working at high levels in the bank over a decade ago (as Deputy Governor and Head of Economics). He is also only 54 so has plenty of time left in a career to serve a couple of terms.
Orr was the perfect candidate from the new Government's point of view. He was also rare, being the only candidate with that mix of skills and experience in New Zealand. The prospect of another international hire -- given the Graeme Wheeler experience -- may not have been attractive to either the bank or the new Government.
Luckily for the Government, Orr chose to take the job, which involves a 40 percent pay cut and to move from Auckland's weather to Wellington's weather (and he will not have been fooled by the current hot and calm streak).
This selection could have turned into a major problem for the Government.
Robertson was so concerned about the potential to be lumped with a Reserve Bank Governor he didn't want that one of his first actions when he was sworn in on October 26 was to have a quiet chat with the chair of the Reserve Bank Board, Neil Quigley.
The Reserve Bank was most of the way through selecting a Reserve Bank Governor to replace the retiring Graeme Wheeler and had closed applications on July 8. The risk was that the board, which was appointed by Bill English, would foist a status quo selection on Robertson who could obstruct the new Government's plans to reform the Reserve Bank Act and the way the central bank runs monetary policy. Most believed the Reserve Bank was ready to recommend Deputy Governor Geoff Bascand to replace acting Governor Grant Spencer.
"One of the things I did was speak to the chair of the board when I first took up this role to ensure that the process of appointing the Governor included the candidates being aware of the direction that we were going in and to assess their ability to implement that direction," Robertson said.
"I've been assured by the chair of the board that Mr Orr is in a position to do that and that he will be able to manage a period of change well for the board, and I've accepted those assurances," he said.
Robertson told a post-cabinet news conference that Orr was his top choice and would be popular with financial markets. The New Zealand dollar rose more than half a cent to a one-week high over 69 USc by early evening after the 4pm announcement.
"This will be an appointment that will be welcome right across the financial sector. Mr Orr is highly regarded. He does have expertise in a technical sense from his time at the bank previously, and is obviously a very well respected CEO as well," Robertson told the news conference.
"We're delighted about the appointment and if the markets are pleased that's a good thing too."
Asked if Orr was at the top of Robertson's list of possible candidates, he said: "Yes he was. He is a person who I have long held in high regard for the work that he's done at the Super Fund and when I thought about who should do the role, he was there."
Robertson said he believed Orr would be a good 'change manager' for the Reserve Bank as it adjusted to a new Policy Targets Agreement with Robertson and prepared for changes to the Reserve Bank Act.
"He has run the Super Fund extremely well. It is one of the most successful sovereign wealth funds in the world. The experience he got working in the real economy will be very useful as we go down the path of change."
2. PTA will include review language
The Government has already begun a review of the Reserve Bank to give it a dual mandate that targets maximising employment as well as keeping inflation stable and low.
Robertson also wants the bank to move to a full monetary policy committee system where members from outside the bank are involved and the bank issues minutes -- a system well established in Australia, Britain and the United States.
Robertson later reiterated that the first Policy Targets Agreement would include the bank focusing on maximising employment as well as price stability. It will be signed before Orr takes up his appointment on March 27 and include work being done by a group reviewing the Reserve Bank Act.
"The review group is getting underway and are beginning to look at what kinds of language could be included in the Act. We'll use that to reflect that in the Policy Targets Agreement," Robertson said.
3. A 40 percent pay cut and Wellington weather
Robertson was asked repeatedly about Orr's pay and he acknowledged Orr would have to take a pay cut of almost 40 percent to do the job.
Orr will also be moving from Auckland to Wellington, where the Reserve Bank is headquartered.
Orr was paid $1.22 million for the year to June 30, 2017 as the CEO of the NZ Super Fund, up 15 percent from the previous year and up 42 percent from the 2014/15 year. The size of the increases drew criticism from the then-Finance Minister Bill English and the State Services Commission.
Robertson said the Reserve Bank board chairman had said Orr would be paid within the current band of pay for the current Reserve Bank Governor. The Reserve Bank's annual report for 2016/17 shows the Governor was paid in a band from $850,000 to $860,000, although this included $101,000 in cash for accrued leave, meaning the regular remuneration for the Governor was around $755,000.
The NZ Super Fund said Orr would move to Wellington for the role.
Robertson said he believed Orr had been part of the appointment process before the Government was appointed. He said Orr had been the first candidate put forward by the board, either formally or informally.
"He sees it as a great honour to serve his country in this role," Robertson said.
4. A positive early reaction
The Bankers Association welcomed the appointment of Orr, as did other economists.
"New Zealand is lucky that we have someone of the calibre of Mr Orr available and willing to do this job. He is extremely capable and at the same time grounded in the real issues that matter to New Zealanders," Association chair and Westpac CEO David McLean said.
“He is very well thought of within the worlds of economics and finance within New Zealand, and in his most recent role as CEO of the New Zealand Superannuation Fund led that organisation to a position of respect among global sovereign wealth funds which was out of all proportion to its size," he said.
Economists also pointed to that rare mix of being an outsider and an insider at the same time. They also pointed to Orr's very accessible style of communicating with the public.
"While this is not an internal appointment, Adrian is closer to being a Reserve Bank insider than other recent Governors. Neither of the past two Governors had ever worked for the Reserve Bank before they were appointed, and Don Brash worked there only briefly as a graduate," said Westpac Chief Economist Dominick Stephens.
"Adrian will start with an excellent understanding of the Reserve Bank and both of its key policy functions, monetary policy and financial sector regulation. He is well known as a strong communicator and is no stranger to the media, which bodes well for the clarity of communications with financial markets," he said.
5. 'Bollocks' to Winston
Orr will certainly have a different style from Wheeler, who did not do a single live radio interview or television interview during his full five year term. Don Brash and Alan Bollard both regularly appeared on radio and television to explain the Reserve Bank's actions and approach.
Orr has an engaging and colloquial style as a public speaker and is comfortable talking on both camera and to large audiences. He rarely speaks straight from notes and will be a breath of fresh air for the public, who have become used to a lower profile, dryish and academic Governors in recent years (if they saw them at all). Most could have named Brash and perhaps Bollard. Wheeler was well under the radar as to be subterranean for most New Zealanders.
However, Orr's free-form commentary style and jokey manner comes with some risks too, although he has plenty of experience as Reserve Bank Deputy Governor in handling the nuances of talking to financial markets.
To get a sense of how different Orr is to his predecessors, here's some of my reporting of an evening speech he gave at an Institute of Directors event in Wellington on November 16.
He was upbeat about the state of the world economy and rubbished suggestions in a question from the audience about the prospects mentioned by Winston Peters last month of a sharp slowdown in the global or local economies next year.
"Bollocks," he said when asked of his view of Peters' prediction of a looming global slowdown.
He described the global economy as in a "Goldilocks zone" of strengthening economic growth with low inflation and low interest rates.
"We are in a very, very positive situation," he said, pointing to real per capita GDP growth of 2.5 percent in Japan, for example.
He said global stock markets were neither wildly over-valued or under-valued, with Europe and Japan about 10 to 15 percent under-valued relative to long term valuations, while the United States was around 5 to 10 percent over-valued.
"Should there be a large downturn in 2018 that would be fantastic," Orr said of the likely effects on asset prices, given the NZ Super Fund was a long term investor keen to buy assets during downturns in the knowledge they would bounce back over the long run.
Orr talked extensively about the long term effects of demographic change (with ageing populations in the developed world and the urbanisation of younger emerging markets) and the effects of climate change. The one caveat was China, which "got old before they got rich."
6. He cares about climate change and housing
Orr may also be the first Reserve Bank Governor to think a lot more about climate change and infrastructure funding. He has made them a central part of the NZ Super Fund's thinking.
He said back on November 16 that the NZ Super Fund had reduced its carbon emissions exposure by 20 percent and aimed to further reduce its exposure to carbon reserves from the 20 percent reduction already achieved to 40 percent. He said politicians and voters in some countries were in denial about climate change.
"It's the tragedy of the horizons," he said then.
But regulators and consumers were already reacting, and climate change itself was already having dramatic effects on economies. Investors and companies should move to get ahead of the likely impacts, he said then.
"It's on its way. You don't have to buy into the science. You just need to understand that the regulatory response and the consumer response is here already."
Elsewhere, Orr said one of the biggest challenge for investors and Governments was connecting up a wall of capital with the huge need for infrastructure investment as the emerging world urbanised and the developed world dealt with ageing and climate change.
He said the world's most powerful governments and politicians were mayors and councils who were able to green light or block infrastructure developments in cities, which was proving the biggest obstacle to matching the wall of capital waiting to be invested with the infrastructure projects.
"The two just can't seem to plug and play," he said.
Orr also downplayed the risks around central banks having to withdraw stimulus from the global economy as the recovery took hold.
"The world is awash with liquidity and thank God for that. That's what central banks are supposed to do and it has worked," he said.
He expected central banks would be able to carefully and slowly.
Orr's final parting shot for the Peters view of the world came in answer to a question about whether he was concerned about the risks of a nuclear conflagration in North Asia caused by Donald Trump.
"We might be able to solve two of those things because Winston is going to North Korea..." he said, referring to speculation Peters might be called on to act as independent intermediary in talks between America and North Korea.
Here's the prepared remarks for the speech, but Orr went well (and entertainingly) off piste in the speech itself.
Journalists and audience members will no doubt hope he continues to do that as Reserve Bank Governor. His communications staff and a few politicians may not be so keen.
7. 'Billions at stake'
Newsroom's Environment Editor Eloise Gibson and Auckland reporter Cassandra Mason have published a major series on the effects of climate change on sea levels today.
They report that councils are still using outdated advice on the likely amount of sea level rise after the previous Government held back advice.
In particular, the Thames-Coromandel District Council approved 73 new apartments on an empty section with the assumption of 0.49m of sea level rise, when the latest advice is for two metres by the end of the century.
In 2015, Thames-Coromandel District Council approved a subdivision of 167 coastal sections after rejecting advice from flood experts at Waikato Regional Council to consider 2m higher seas. The district council factored in 1m, instead, noting in emails to the regional council that any updated government guidance wasn’t likely to arrive in time.
See their full reports here, including the latest comments from James Shaw.
The now-Opposition will face some tough questions on why the advice was withheld.
8. Briefly in our political economy
Paddy leaving gallery - In a move that may please some and disappoint others, TV3 Political Editor Patrick Gower announced he was leaving as political editor to become a national correspondent for TV3 based in Wellington. He has been in the press gallery for a decade, working first for the New Zealand Herald, and then TV3. He did fantastic job as the chair of the second televised debate in the election campaign.
No inflation breakout - ANZ published its monthly inflation gauge for November yesterday, showing underlying non-housing inflation of 0.1 percent for the month and 1.1 percent for the year. Overall, the index was up 0.2 percent for the month and 2.8 percent for the year. "It’s a case of ‘same old, same old’ – some housing elements and some seasonal swings. There are still no real signs of a generalised lift in inflation," said ANZ Chief Economist Sharon Zollner.
Stronger spending - Statistics New Zealand reported retail spending with debit and credit cards rose 1.2 percent in November from October, which was faster than the 0.5 percent seen the previous month and faster than the consensus economist forecast for a rise of 0.5 percent.
Outlook downgraded a bit - The Ministry for Primary Industries published its half-yearly Situation and Outlook For Primary Industries yesterday. It forecast exports in the year to June 30, 2018 would rise 8.5 percent to $41.4 billion, however this was $265 million less than the last forecast. MPI said a lower dairy forecast was partially offset by a more positive outlook for red meat and other primary sector products.
"This year’s wet spring has affected early season dairy production and slowed the sowing of some arable and vegetable crops. On the other hand, pasture conditions for the sheep and beef sector have been positive so far this season," it wrote.
9. One fun thing
This twitter exchange overnight gave me a smile:
Sky News Newsdesk: "U.S. President Donald Trump has signed a directive which has made sending a human back to the Moon part of U.S. space policy."
FleetStreetFox: "Great. Can it be Donald?"
10. This morning's political links
These are available in the morning email