Weak expectations and accountability

The Reserve Bank released the results of its Survey of Expectations yesterday afternoon  – aggregated responses from 60 or so relatively informed participants.  For some reason, this quarter they have separated the release of the survey of household inflation expectations, which is now apparently not due until next week.

After the release of the previous results in August I wrote a post that provided a fairly downbeat assessment of the information in the two surveys, a little in contrast to the commentaries I saw at the time from market economists.

I’m a participant in the survey, and had actually revised many of my responses up a little from those I provided in August.  But my reading of the results suggests that the respondents as a group are about as downbeat as they were in August.  In particular, there is little sign of any sustained pick-up in inflation expected over the next year, despite the repeated Reserve Bank rhetoric.

This isn’t going to be a long post, but just a few highlights:

First, respondents expect the economy to do no more than limp along, beneath capacity, for the next two years.  The unemployment rate is expected to stay at or above 6 per cent throughout, and GDP growth of 2.2 per cent and 2.4 per cent is expected in next two years.  Those would be fine growth rates for Japan, with a slightly falling population, but New Zealand’s population growth was estimated at 1.9 per cent in the year to June 2015.   There doesn’t look to be much per capita growth envisaged by respondents, even with the lagged effects of monetary policy easing, unless respondents are expecting quite a sharp reduction in the net migration inflow.

Second, inflation expectations remain very subdued. Fortunately for the Reserve Bank, two-year ahead expectations have done no more than reverse last quarter’s slight bounce, and are still at 1.85 per cent.  But one year ahead expectations are only 1.5 per cent, and expectations for the second six months of the one year period (beyond the immediate “noise” of oil price fluctuations) are no higher than those for the first half.  In the whole period since the recession started in 2008 only once have those second six month expectations been materially lower than they are now,     Respondents still appear to loosely believe that the Reserve Bank is aiming for 2 per cent, but they aren’t seeing any signs that suggest the Reserve Bank will get it there soon.  Since the various core inflation measures are 1.5 per cent at most, at best they seem to envisage a continuing undershoot.

inflation expecs

Third, respondents don’t appear to expect much more of an OCR cut.  Even a year ahead, respondents expect the 90 day bill rate to be 2.79 per cent, probably not even consistent with a full expectation of the OCR being cut to 2.5 per cent.

However, the survey also asks respondents about their expectations for monetary conditions, both currently and a quarter ahead and a year ahead.  Each respondent can decide for themselves what counts for assessing monetary conditions –  the exchange rate, the OCR, equity prices, retail lending rates, LVR restrictions, or whatever.  Since the survey began in 1987 there have only been two quarters when respondents thought conditions were easier than they are now.  But typically when respondents think conditions are easier than neutral they don’t expect that state to last for long –  looking a year ahead they typically expect things to tighten.  For the last year or so that hasn’t been the case.  The extent of the extra easing isn’t large, but the fact that is expected at all in unusual.  It is not a sign of confidence that the Reserve Bank has yet got on top of things.   Expectations a year ahead are for looser conditions than they’ve expected at any time since this question was first asked in 1999.

expected mon con.png

The OCR is still 25 basis points higher than it was at the start of last year (as are the floating retail rates the Bank reports).  Over that period, inflation expectations (at least measured by this survey) have fallen by about half a percentage point.  Inflation expectations implied by the spread between indexed and conventional government bonds appear to have fallen a bit further (to only around 1.3 to 1.4 per cent).  So real short-term interest rates are at least 75 basis points higher than they were at the start of last year.  Why? For what?

Since that time, we’ve seen little or income growth, little real per capita GDP growth, the unemployment rate stop falling and start climbing, and inflation continue (on a core basis) to be well below the 2 per cent target midpoint (focal point) that the Governor explicitly signed up to only three years ago.

As I noted in my post yesterday about Stan Fischer’s speech, effective accountability in any area of life isn’t just about talk: it  has to imply that there is potential for adverse consequences for the independent decision-makers themselves. As in any area of life, a single mistake is usually not a safe signal of anything much.  But established patterns of error must raise more serious questions if the much-vaunted accountability is to have any real meaning.   This is looking quite like a repeated pattern of errors, compounded by a reluctance to acknowledge errors or to learn from past mistakes.