I went into town this morning to talk to the Reserve Bank’s inquiry looking into the possible leak of last week’s OCR announcement (see last paragraph here). I still have no idea whether there really was a leak, but it seems likely, and if so it seems likely to have come from one or other of the lock-ups the Bank runs, for analysts and for the media.
But the discussion this morning got me thinking again about some of the Reserve Bank’s processes around OCR decisions and Monetary Policy Statements. Insiders will recognize some old familiar arguments.
In many ways, it is remarkable that the Reserve Bank has not had an OCR leak, deliberate or inadvertent, before now (the memory of a couple of other earlier ones – one deliberate and wilful, one inadvertent, are still seared in my memory). As the Governor noted in his press conference last week, the decision to cut the OCR had been made the previous Friday – six days before the announcement. That delay is shorter than it used to be – at one stage, the OCR decision was being made more than two weeks prior to release – but much much longer that it needs to be, or than is the typical practice in other countries. In other countries, official interest rate decisions are typically announced within hours of the decision being made. Draft news releases announcing the decision (and covering the range of possible options) must be part of the package of papers before the respective decision-making committees.
Delays have not always been that long in New Zealand. Prior to the introduction of the OCR in 1999, the Governor used to finalise any announcement on monetary policy (since we weren’t setting a specific interest rate, the announcements were more about the Bank’s overall take on things) at a 7:30am meeting in his office on the morning of the release of the Monetary Policy Statement.
The long lag between the Governor taking the OCR decision and the release of that decision arises solely because the Reserve Bank has chosen to release, four times a year, Monetary Policy Statements at exactly the same time as the OCR announcement (in fact the OCR announcement on these occasions is chapter one of the Monetary Policy Statement). Long documents take much longer to finalise than one page OCR announcements do.
But there is no need for the two documents to be so intertwined. Other central banks typically don’t do it that way. In fact, in law, the Reserve Bank only has to publish two MPSs a year. And, frankly, the MPSs (which are shorter than they used to be) often don’t add very much beyond what was in press release – or certainly not much that couldn’t wait for a few days. I’d favour the Bank moving to a system of monthly OCR reviews (well, 11 months a year), making the announcement the day the decision is made, and moving to publish two, or at most three, Monetary Policy Statements a year, not tied to the date of any particular OCR announcement. On the one hand, it would improve security and markedly reduce the opportunity for inadvertent leaks, and on the other it might encourage the MPSs to become vehicles for more substantial background analysis and evaluation, along the lines of what the statutory provisions seems to envisage.
The counter-argument, of course, is that monetary policy is forecast-based, and so we need to see the forecasts to make sense of the policy. It is fine argument in principle, but bears little relationship to reality. Mostly, central banks respond to the immediate flow of data. Yes, those data have implications for what happens in future, but almost all the information is typically in the initial revision of view – about where things are right now, or perhaps a few months ago. And, of course, as anyone who has been inside these processes knows, the forecasts are often adjusted to reflected the Governor’s priors about policy and policy messaging (the stuff dealt with in a couple of paragraphs in the press release). That isn’t a criticism – we know so little about the future that I think it is mostly right, proper and sensible as an approach. But a full set of forecasts, and all the commentary that goes with them just isn’t necessary for the policy messages to be got across effectively. In fact, often less text is better than more on a policy announcement day – there is less chance of inadvertent differences of emphasis etc.
My other suggestion is to consider discontinuing lockups. Other central banks typically (as far as I know) don’t do them: they put the policy announcement out in the public domain, including as much or as little elaboration in the statement as the occasion warrants, and leave it to analysts and markets to work it out for themselves (sometimes with the benefit of later, open, press conferences).
There is case for lock-ups for some sorts of releases. Government budgets seem like a reasonable example, when there is a multitude of announcements, often of complex unfamiliar material. Or the release of major in-depth reports on some specialized aspect of government (which might be hard to report well, but perhaps not very market-sensitive). It isn’t obvious that OCR announcements fit that bill.
Of course, the Bank does not typically do lockups for the OCR announcements that don’t come as part of Monetary Policy Statements, suggesting that – in principle at least – the Bank agrees that OCR announcements don’t need lockups. The lockups must be for the rest of the MPS documents. But they are quite familiar in structure and content, and little of the content is particularly complex or unfamiliar.
The Bank’s lock-ups come with two sets of risks. The first is the risk of leaks. The information in OCR announcements is enormously market sensitive – look at how much and how quickly the exchange rate moved on last week’s announcement, creating a huge incentive for someone to try to cheat. 40 years ago it might have easy to secure people in an ordinary room, with no risk of them being able to communicate with outsiders. Central bankers weren’t at much of a disadvantage in managing those who might want to cheat. It is hard to believe that the playing field is quite so level these days, with all the advances in technology, including very small scale technology. At least while I was at the Bank, the analysts’ lock-up used to occur in a room in which people could be seen quite easily from neighbouring apartments (other clever ways of signaling, getting round the rules, were covered in this recent New Yorker article – more, outside fiction, than I had ever read about bridge). Perhaps no one ever abused the systems, but why take the chance that someone one day finds (or just exploits) a way around the Bank’s precautions? Perhaps they did last week.
The second risk, and perhaps more often practically important, is that the lock-ups are not just occasions when people are shut in a room with a document and left to digest it. In these lock-ups staff, often quite senior staff, are available to answer questions and offer clarifying comments. There is often plenty of ambiguity around Reserve Bank statements – it isn’t like the specifics of a technical Budget announcement – and that creates the risk that attendees of a lock-up get information on the Bank’s views and interpretations that isn’t available to everyone else, or that people get slightly different messages depending on who they happen to talk to in the lock-ups.
It is quite valid for the Reserve Bank to have messages it wants to convey with OCR releases. Those messages should be written down – debated and refined internally as required – and then be available to everyone. Further comment shouldn’t really be necessary, but if it is necessary or desirable to have occasional press conferences then at least (as the Bank does) they can be audible/visible to all (via the webcast).
On another, different, Reserve Bank topic, I was talking the other day to a business person who had been visited by Reserve Bank staff on their regular business visits, gathering conjunctural information. This person told me that he had asked the staff whether the Bank was doing any work on reforming the governance of the institution. The staff apparently responded that they were doing so.
If this report is accurate it is quite newsworthy. Previous reports had led us to believe that the Bank had done extensive work on possible governance reforms, but had completed the project. They would not release any of the papers relating to the work. Information that The Treasury released a few months ago confirmed that the Bank’s work has been discontinued, and that the Minister of Finance had indicated (against Treasury’s preferences) that he did not want work in that area continued with. Perhaps some journalist might care to ask the Bank whether this report is accurate, and whether they do have work underway on governance reforms. If they do, and if the Minister is becoming more interested, that would be very welcome news. But perhaps some young economist just had the wrong end of the stick, or misinterpreted the question?