I’m heartily sick of the Reserve Bank leak story and hope that this is the last occasion I write about it.  But there were a few further points I wanted to make, partly in response to the coverage in the last 24 hours.

I would also add that despite several commenters on various stories having correctly noted that the longstanding system vulnerabilities mean that there may have been previous leaks over the years from people in the Reserve Bank’s media or analyst lock-ups, I’m not sure it would a wise use of time or resources now (or perhaps even possible) to attempt to prove it one way or the other.  But that is a matter for the Reserve Bank.

Much of the media commentary has been about the abolition of the Reserve Bank’s lock-ups.  The many good trustworthy people pay the price of one peripheral player cheating.  Worse, it will apparently be harder to get good reporting and consumers of news will suffer.  And, from some of the economists, a concern that financial markets might be more volatile for the “first few minutes” after the release while economists and traders try to digest what the Bank is saying.   I plead for some perspective.

All of this commentary loses sight of the simple point which I have made previously, and which the Reserve Bank statement yesterday also makes.  Other countries don’t do it the way we were.  No country that I’m aware of had provided advance lock-ups for economists and analysts for official interest rate announcements.  And the handful that do provide some tightly-controlled advance notice for a select group of journalists give them only a few minutes advance notification, not two hours.  Other countries’ central banks don’t provide their staff to provide private briefings to media or analysts in advance of release, in doing so providing different information to those inside those lock-ups than is available to those outside.     What the Reserve Bank wants to say  in its releases should be carefully drafted and refined, and then put in the official documents, and left to speak for itself.  Sometimes press conferences can be useful, but they should be viewable (as the Reserve Bank’s are) by everyone, not only by the select few.  If anything, under the new arrangements, the press conferences may even allow better scrutiny and more searching questioning of the Governor, since future press conferences will occur an hour after the release (rather than a few minutes after as has been the case until now).  That will allow journalists to talk to economists, politicians, sector group leaders etc before they pose their questions to the Governor.

It is worth remembering, again as I’ve pointed out previously, that half of each year’s OCR announcements have always taken place without benefit of lengthy explanatory lock-ups (or press conference).  The full scale lock-ups have been used for Monetary Policy Statements, but not for the other intervening OCR reviews.  I’m not sure there is any evidence that the market reaction to those one page statements has been any more difficult or volatile than for the MPS releases.

Nonetheless, I think there are still some aspects of the new regime that will require some bedding down, and perhaps later refinement.    I’ve long thought it was a mistake to release OCR announcements at exactly the same time as MPSs. A better model, in my view, would be to release the OCR decision as soon as it is made (further reducing another aspect of risk in the system) and then to release an MPS a few days later, as background analysis (looking forward, and providing ex post assessments).  In such a model, the MPS would be much less market sensitive (the main market-moving news is in the OCR announcement itself). For such a background document, there might be less harm (but less interest) in a lock-up to explore the technical detail of the forecasts.

More immediately, the Reserve Bank should consider adopting the idea proposed by former Czech central bank head of communications Marek Petrus (discussed on his Lombard Rates blog, and here on mine) that the Bank should host an analysts briefing later in the day of the MPS release.  In such a briefing,  analysts could ask questions of the Bank (in person or by phone –  akin to conference calls investment banks run), and the Bank  might also be able to use the occasion to resolve  openly any misinterpretations that had arisen over the day.  But the critical aspect of the arrangement is that the briefing would be webcast (as the press conferences are) so that everyone has the same information, whether in Wellington, Auckland, Singapore, or New York, whether economist or not.  A concern about the new system the Bank announced yesterday is that it will resolve one problem and open another.  The analysts lock-up (and the later economists’ lunch) has always had problems in that they sometimes provided information to attendees that wasn’t available to everyone else.  In the new world there is a risk that there will be high rewards for those – especially the Wellington-based – who, searching for nuance, secure coffee discussions with the Chief Economist or the Manager, Forecasting.

Somewhat surprisingly, even the Prime Minister has weighed in, calling for the Reserve Bank to reconsider, noting that Budget lock-ups had worked well.  I’m not sure whether The Treasury uses more robust systems to reduce the risk of leaks (perhaps they will be reviewing them in light of the Bank’s experience?), but even if they aren’t the case for a lock-up for Budget material is much stronger than for MPS.  First, there is typically a wide range of material across huge number of portfolio areas.  Second, often new initiatives are being announced, with technically complex details.  And third, not much about the Budget is typically very market-sensitive, especially as the Beehive typically provides strong hints (or more) on the juicy stuff in advance of Budget day.  By contrast, OCR announcements and MPS releases are really just the same old stuff over again (new data, new rate, but the same basic framework), but the bottom line is highly market sensitive, and there is no pre-briefing of selected journalists.

Changing tack, I have been a little surprised at how little of the media coverage has focused on the Reserve Bank’s weak systems.  Perhaps that is understandable: the media has the strongest interest in the story as it affects them (changes in lock-up arrangements), and the Reserve Bank is a powerful institution and most of them want to remain on good terms with the Bank (even while complaining quietly).  But what happened in this episode involved two things:

• A MediaWorks staffer who breached his own express or implied commitments to the Reserve Bank (not to communicate the information before the embargo lifted)
• A central bank that ran lock-ups that, it turns out, used no technological protections, and relied totally on trust to protect extremely sensitive information.

I was trying to explain the story to my children last night.  I told them that I had no reason to distrust the people who live on my street, but that nonetheless I would irresponsible if we went out and left the doors wide open, simply relying on trust that nothing bad would happen.   Most of the time, nothing bad would happen.  But if and when it did, people (including the insurance company) might reasonably talk of contributory negligence.

Managing highly sensitive information is not incidental to what the Reserve Bank does, but integral.  And yet they unnecessarily sit on the OCR decisions for six days, running risks of (inadvertent) release by someone inside the institution.  And they tell the Minister of Finance –  when he and his advisers will have their own agendas –  more than hour before the announcement.  And –  the focus of this episode –  they have dozens of people from the financial media and financial institution economists in lock-ups which were secured by no more than trust.    I don’t think I had realized until last night quite how bad the situation was.  On entering the lock-ups participants have to hand in their phones, but all continue to have access to their laptops with active internet connections throughout the lock-ups.  There was, apparently, no effort ever made to secure either individual laptops or the rooms where the lock-ups were held (to physically prevent transmission until the embargo is lifted).    In an earlier post, I touched on hypothetical risks –  the analysts lock-up used to be held in a room easily overseen from neighbouring apartments – but all the time anyone in the lock-ups could simply have emailed the news to anyone they chose.  It is staggeringly lax.  Mike Hannah, Head of Communications was quoted in yesterday’s press release on the new arrangements, but these previous lock-ups were his responsibility.  What were he, and his boss Deputy Governor, Geoff Bascand, doing in allowing such incredibly lax security?  They left the door wide open, and eventually (at least) one person walked through it.

As I noted yesterday, it is surprising that the Governor’s press release took no responsibility for any of this, and offered no apology for it.   I hope the Bank’s Board (and its audit or risk committee) is asking some hard questions.

Finally, I remain irked at being accused by the Governor of being “irresponsible”, for not passing on to the Bank the email I received (from someone not in the lock up) as soon as I received it.   As I have already noted, I had no relationship of trust with the Bank, owed them nothing, and in passing on the information at all –  acting with a sense of public responsibility, and a concern for the best interests of an organization I had worked for for decades –  I have probably jeopardised my future relationship with MediaWorks.  I am also irked that yesterday was the first time I had heard the Bank suggest that I was somehow to blame.  It has the feel of a line made up after the event, to distract attention from the real story: the Bank’s weak systems, and a security breach by a journalist who the Bank had allowed to participate in its lock-up.

Let me explain.  And if the detail is painstaking, feel free to stop here. This is for the record as much as anything.

As I have said previously, I received an email from a MediaWorks employee at 8:04am on the morning of 10 March.  It is reproduced in the Deloitte report.  It read.

if true, that is very encouraging –  at last.  I  have thought it a bit more likely than the market pricing, but…one never quite knows

Just for the avoidance of doubt, the email did not come from anyone inside the Bank (or inside govt).

And finally, as I have noted to them, the Reserve Bank might want look to the security of its systems.  I had an email out of the blue at around 8 this morning-  most definitely not from someone in the Bank –  telling me that the sender had just heard that the OCR was to be cut by 25 basis points.  I have no way of knowing if it was the fruit of a leak, or just inspired speculation, and was relieved to see the foreign exchange markets weren’t moving, but it wasn’t a good look.