I had a look at ten OECD countries/areas whose central banks have since mid-2009 raised their policy interest rates and subsequently lowered them again. I was curious as to how quickly those reversals came, and what else was going on.
The overnight interest rates for these countries are shown below. Overnight rates aren’t the same as policy rates, but the OECD has these data readily available.
A couple of cases we can fairly quickly set to one side. The Bank of Canada began raising its policy rate in mid 2010, and only in late 2014 did it make a single subsequent cut. Iceland raised rates in 2011, and did not cut again until mid 2014. Given the turbulent circumstances of Iceland, the stability in policy rates is quite surprising.
Australia and Chile both benefited hugely for a time from the late phase in the hard commodities price boom that peaked in 2011. In both cases the increases after the 08/09 crisis seemed pretty well-warranted, and in Chile’s case the peak rate was held for two years before some cuts were put in place. In neither country’s case has inflation been uncomfortably low relative to the target.
I don’t know much about Israel, but the very shortlived nature of the post 2009 peak interest rate, combined with the fact that the policy rate has subsequently been cut to new lows, and that CPI ex food and energy inflation has been running well under 1 per cent for some time suggests a policy mistake.
The Swedish policy mistake has been well-documented by Lars Svensson (and only rather grudgingly accepted by the Stefan Ingves, the Governor of the Riksbank). Both Sweden and Norway will have been affected by the unforeseen severity of the euro crisis, but in Sweden’s case in particular there was a clear misjudgement by the policy committee.
The ECB’s policy tightening in 2011 proved to be extremely shortlived. I’m not aware of anyone who would call it anything other than a mistake. There is probably a variety of factors that influenced the ECB at the time, but they acted too soon, under no (inflation target) pressure, and quickly had to reverse themselves.
Finally, we have the Reserve Bank of New Zealand, the only one of our ten central banks to have reversed itself twice in five years. The 2010 increases took place at a time when a variety of other central banks were raising policy rates. There was some reason to think that the recession was behind us, and that it would be prudent to begin raising rates. I wasn’t involved in the Reserve Bank’s 2010 decisions – I was on secondment at Treasury – but from memory I thought they were sensible moves. As it turned out, by the time the rate increases were being put through the economy was already turning down again, and had a shallow “double-dip recession” The February 2011 earthquake was the catalyst for cutting the OCR again. Initially, it was sold as a pre-emptive step, but we fairly soon realised that the level of interest rates actually needed to be lower even once the initial shock had passed.
And then the Reserve Bank did it again. I’m not going to rehearse the ground I covered this morning, but it is difficult not to put this episode – the increases last year, now needing to be reversed – in the category of a mistake. It is harder to evaluate other countries’ policies, but I would group it with the Swedish and ECB mistakes. Monetary policy mistakes do happen, and they can happen on either side (too tight or too loose). But since 2009 it has been those central banks too eager to anticipate future inflation pressures that have made the mistakes and had to reverse themselves. As a straw in wind, in a country with an unusual governance model, it should be a little troubling that our central bank appears to be the only one to have made the same mistake twice. It brings to mind the line from “The Importance of Being Earnest”:
To lose one parent may be regarded as a misfortune; to lose both looks like carelessness.”