The Reserve Bank’s challenge tomorrow

I ran a couple of cartoons from my 1980s and 90s collection a couple of weeks ago.  Many of the ones in my folder were about monetary policy –  the hugely controversial disinflation process we were engaged in, trying to get inflation down to 0 to 2 per cent per annum, and then keep it there.  No one much believed we would manage it (or even be allowed to do so by the political process)  –  there were even cartoons along the lines of “pigs might fly”.  This was one from my collection.

william tell cartoon

These days the challenge is the other way round –  getting inflation back up to (a now higher) target.

This chart shows inflation over Graeme Wheeler’s term as Governor. It has never got nearer the 2 per cent target midpoint that he and the Minister explicitly inserted into the PTA in 2012.  Most of the time, the annual inflation rate has been below the 1 per cent lower bound of the target range.

wheeler inflation

And so the cartoon struck me as apposite on the eve of the next MPS.  At almost every single OCR review and MPS the Governor has assured us that inflation will soon be getting back to around 2 per cent. Each time, so far at least, he has been wrong.  Forecasts have been revised down repeatedly, and with them the OCR.

Of course, if you look carefully, that cartoon was dated March 1991. By the end of that year, inflation was finally inside the target range.  Indeed, most studies looking at New Zealand’s experience of low inflation start from around then.

Perhaps we will be surprised, and after all the surprises and failures  so far inflation really will be back to around 2 per cent before too long.    The right monetary policy judgements are a part of making that prospect real.

8 thoughts on “The Reserve Bank’s challenge tomorrow

  1. Sadly for Mr Wheeler he is a hostage to international events that he has zero control over.

    So unless he pulls a rabbit out of his hat tomorrow with a 50bp or more cut, the likelyhood is that that $ will either dip momentarily and then rally or just rally. Currently the markets have priced in a 25bp cut and the $ is actually drifting up today.

    Where this will leave the RBNZ, who knows. Oil is off 15%+ from its recent highs and Kiwi strengthening – so all in all next inflation number could have a negative in front of it. Somehow I would not be surprised if we see a sub 1.50 rate sometime in 2017 – noting that NAB is now calling that the RBA will be dropping their rates down to 1% in 2017 – and where Oz goes, in all likelihood we will have to follow…


  2. Don’t think Wheeler has much of a choice. It would have to be at the least a 25bp cut with a strong easing bias in his commentary of more cuts to come.

    NZ Households savings deposits are now at a record $156 billion, an increase of $28 billion from June 2014. NZ household debt is only $135 billion if we exclude investment property debt of $60 billion which is really for commercial activity.

    Banks are under tremendous pressure to lend that savings out. High risk ventures, eg development finance has dropped to around 5%. Pretty soon banks will keenly seek to lend towards a larger Space industry in Gisborne, desperate to get lending out with LVR restrictions going up to 40%.


  3. I remember the 89-90-91 era. It was a crap time to be in business and was the time the our citizens began leaving NZ in droves.( or as the Nice Mr key often noted by plane loads.)
    Businesses were closing, couldn’t sell your car, unemployment rocketed up, (BOP went to 11%+) so in general an appalling failure of management of NZ.Oh and Interest rates went where, uphill all the way.

    Not a great example of what to do at all.

    Least we forget.


    • Similar situation in 06-07-08 when Allan Bollard with trigger happy interest rate rises up to 10% drove a bouyant NZ economy into a deep recession. Then conveniently blaming the GFC for the recession. NZ recession had nothing to do with the GFC and everything to do with bad decisions by the RB governor.


  4. Actually in 1991 few people went to Aus because they had a recession about as bad as ours was.

    But yes it was a tough period – and that folder of cartoons is full of examples anguishing about the unemployment consequences.


    • About then I was without a business so went about doing a door knocking task. Met many many people in the 91-92-93 period who were on their way. It started a drain that never ceased until this last year. Imagine NZ had we had better Governance by both government and the RBNZ.But they became wedded to the fools paradise that believes interest rates and controlling inflation using them was the way forward. Nothing there that says actually Kiwi’s want government that points them to becoming wealthy by making selling etc and not borrowing to create unearned wealth. i.e. too much socialism. Too many MP’s.


  5. Per my commentary above, RBNZ cut 25bp, series of very weak statements at the press conference and accordingly at current market pricing, dollar is above 73.

    So looking forward, my guess is as follows:

    1. Increasingly likely that headline inflation figure will be negative basis oil & dollar strength.
    2. RBNZ will be forced into cutting again – sub 1.50 even sub 1.25?
    3. Inflation expectations (which they highlight as a risk) will decrease and we now have heightened risk of slipping into deflation.

    Personally I thought it was a poor performance at today’s press conference by Mr. Wheeler, realistically if he was only going to cut by 25bp, to avoid what occurred he needed to come in with a strong commentary that he would do whatever was required to weaken dollar and meet his inflation targets.

    And per market pricing of our currency – market listened to what he had to say and then brought our currency, thereby doing the reverse of what he wished/intended for the market to do.


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