Former Reserve Bank governor Graeme Wheeler criticises central banks' performance during COVID-19 pandemic


The Reserve Bank (RBNZ) and other central banks of developed economies have been lambasted in a report by the free market think tank, the New Zealand Initiative.

Former RBNZ Governor Graeme Wheeler has co-authored the report which roundly criticises central banks around the world for serious mistakes in monetary policy during the pandemic which allowed inflation to get out of the control and hit multi-decade highs.

The paper concludes that central banks were too confident about their monetary policy frameworks, their economic models, and lost their focus on keeping inflation in check.

It also said central banks with dual mandates - to control inflation and also maximise employment - had conflicts in trying to balance between the two, while they were also distracted by such issues as climate control.

Wheeler, who headed the RBNZ between 2012 and 2017, said central banks had become complacent and over estimated their ability to keep inflation under control when they were also pumping billions into economies through emergency measures such as bond buying, known as quantitative easing, at a time when interest rates were already low.

"So why are the central banks injecting so much liquidity into the economy? To me it was just bound to come out not only in house price inflation, but also product inflation," he said in an NZ Initiative podcast on the report.

The paper said central banks were too slow to turn off monetary stimulus, and then forced to rush large interest rate rises, which would mean significant losses on the assets they bought, such as bonds.

It said they also wrongly believed the low inflation of the mid-2010s caused by supply side factors such a cheap oil and technology advances would persist.

The current RBNZ Governor, Adrian Orr, has previously said the bank had pursued a "least regrets" policy of supporting the economy during the pandemic and that it was better to do too much rather than too little.

However, the research paper dismissed such an approach.

"Some central bankers have said that there was no alternative and have no regrets at the outcome in terms of explosive house prices and rapidly rising consumer price inflation.

"They are wrong on the first point and should have major regrets on the second."

The RBNZ ended its bond buying last July and started raising its official cash rate in October, which has gone from 0.25 percent to the current 2.5 percent, with expectations it will raise another half a percentage point next month.

Wheeler oversaw the introduction of the loan to value ratios (LVR) in 2013 to control an overheating housing market, but conceded it was a mistake during his term to raise the OCR three times in 2014 when they saw signs of rising domestic inflation only to quickly undo the rate rises in 2015.

Economic commentators and former bank officials have become increasingly critical around the world about the decisions taken to counter the pandemic, which fuelled house prices and share markets, and their slowness to tackle surging inflation.