FILE PHOTO: Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr is pictured during an interview at the bank in Wellington, New Zealand, April 16, 2019. REUTERS/Charlotte Greenfield/File photo

By Lucy Craymer and Renju Jose

WELLINGTON (Reuters) -Former New Zealand central bank governor Adrian Orr's surprise resignation in March was due to his disagreements with the Treasury ministry over proposed cuts to the bank's operating budget, official documents showed on Wednesday.

The Reserve Bank of New Zealand (RBNZ), in an official response to requests received under the Official Information Act, said the reduced funding caused distress to Orr and that the impasse risked damaging the working relationship.

"(It) led to Orr's personal decision that he had achieved all he could as Governor of the Reserve Bank and could not continue in that role with sufficiently less funding than he thought was viable for the organisation," the response said.

In April, Finance Minister Nicola Willis said the central bank's operating budget would be cut by about 25% in the coming fiscal year and set at roughly NZ$150 million ($90.90 million) for each of the next five years.

This announcement came after lengthy negotiations between the RBNZ and Treasury with the bank initially proposing a budget of NZ$1.031 billion for 2025 to 2030.

A memo authored by Orr to the RBNZ Board on February 14 released on Wednesday said the funding proposal reflected the challenges and risks the bank faced.

By the RBNZ’s February 27 board meeting, it was clear that the Board and the Minister of Finance were willing to agree to a smaller budget than Orr deemed necessary, according to RBNZ documents.

Orr resigned officially six days later, ending a seven-year term that had become contentious after painfully high interest rates tipped New Zealand into one of its worst downturns since 1991.

Nick Tuffley, chief economist at ASB Bank, said he did not see any disruption from either the change in governor or the cut in funding.

"At the end of the day, you still actually do have the level of funding sitting at a very, very high level compared to where you were not too long ago," he said.

The current National Party-led government of Prime Minister Christopher Luxon was critical of Orr's stewardship while it was in opposition, blaming him for soaring inflation after the pandemic and the high interest rates that led to recession.

When Orr was reappointed for a second five-year term in November 2022, Willis, then the opposition finance spokesperson, said the decision was "a serious mistake", calling for an independent inquiry into the bank's monetary policy response during the pandemic.

The RBNZ also said while it and Willis had discussed appropriate levels of regulatory capital for banks, there was no indication that those talks were significant to Orr's decision to resign.

($1 = 1.6502 New Zealand dollars)

(Reporting by Renju Jose in Sydney; Editing by Sam Holmes)