2 Comments 2 Commentsby Eric Frykberg
It says a stable climate is essential for economic wellbeing.
The comments follow a series of persistent attacks on the RBNZ.
A range of critics said the bank's duty to fight inflation was being diluted by focussing its work on too many other things.
This would make life much harder for households and homeowners.
RBNZ governor Adrian Orr argued to the contrary in a speech to a Climate Change and Business Conference in Auckland.
He said historically, economic wellbeing and prosperity were built with the benefit of a stable climate.
“As the climate continues to change, wellbeing and prosperity are harmed,” Orr said.
“To deliver on the Reserve Bank’s purpose, it’s important that we understand this context.”
Critics of the RBNZ argued not only would climate change and other issues dilute its anti-inflation fight, they would hamper proper attempts by the proper authorities to fix these problems.
It was the government's duty to fight climate change, the critics said, but it could not do so effectively without a stable currency.
Similar arguments have been mounted against the RBNZ's obligation to maintain full employment: if it tried to do too many things, it would do none of them well.
The National Party has pledged to end this dual mandate if it wins the next election.
But Orr defended the moves by the RBNZ to incorporate climate change in its programmes.
“Assessing material risks to banks and insurers, and the financial system as an ecosystem, is our core business,” he said.
“Financial stability is best maintained when all relevant risks are identified, priced, and allocated to those best able to manage them. To meet our financial stability objective, it’s important for us to take account of the current and future impacts of climate change."
Orr then went on to describe the steps the RBNZ was taking to integrate climate considerations into its core operations of financial stability and monetary policy.
It was working with over 110 central banks around the world and key New Zealand organisations to better understand and integrate climate considerations into its work.
The bodies being consulted in New Zealand included the Financial Markets Authority, the Council of Financial Regulators, the Bankers Association and the Insurance Council.
Orr then cited an example of how climate change could harm financial resilience, by looking at the effect of drought on dairy farms in the North Island.
“Our modelling showed that the drought, on its own, did not create undue stress. However, when combined with an economic downturn, the drought caused a 40% increase in dairy loan defaults over four years.”
Similar research was underway in Britain, where banks and insurance companies found “climate risks could cause a persistent and material drag on their profitability”.
Australia was planning to unveil the findings of parallel research later this year.
Orr told his audience all this was essential work.
“Modifications to the financial system’s ‘engine’ will be an essential feature of (the new) financial era, as the world seeks to avert the worst of climate change, while transitioning to a clean and resilient economy,” he said.
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We have a growing chorus of economic experts, some who are starting to write open letters to RBNZ Chair Neil Quigley and Finance Minister Robertson, expressing their deep concern at the increasingly political role that the Reserve Bank governor is performing and the risk this presents to the credibility, professionalism and independence of the Reserve Bank. Among these critics is former Reserve Bank governor Graeme Wheeler who co-authored a recent essay about the Reserve Bank’s performance. Wheeler has been highly critical of the Reserve Bank overdoing interest rates cuts as these have been acknowledged as one of the key reasons why house prices exploded last year and for inflation soaring out of control.
What is currently needed for the country – now more than ever – is a Reserve Bank that is focused solely on its core functions. Matters like climate change while important lie outside the central bank’s mandate. Unfortunately, the current Reserve Bank Governor does not react well to criticism. He positively bristles whenever a journalist or politician confronts him, and we also have a Minister of Finance who appears to be asleep at the wheel when it comes to scrutinising the performance of the Reserve Bank.
Respectfully the current Reserve Bank Governor needs to be replaced by a new Governor who can get the RBNZ focused solely again on its core functions.