Alternative facts: a possible interpretation

A reader who is paid to, among other things, monitor the Reserve Bank got in touch to suggest that the Reserve Bank’s claim, highlighted in this morning’s post, to have “initiated an easing cycle in June 2014” was neither a typo nor a piece of carelessness (I’d assumed the latter), but something conscious and deliberate.

Recall that in this morning’s MPS, the Bank wrote that

The Bank initiated an easing cycle in June 2014, by lowering the outlook for the policy rate from future tightening to a flat track, and then cutting the OCR from June 2015

Most people, when they think of an easing cycle or a tightening cycle, think of actual changes in the OCR.  On that conventional description, the OCR was raised four times, by 25 basis points each, from March 2014 to July 2014.  Note those dates: not only was the OCR raised in the June 2014 MPS, but it was raised again the very next month.

And if one compares the crucial final few sentences in the press releases for the March and June 2014 MPSs there is no material change in wording from one document to the other, and there is nothing in chapter 2 of the June 2014 MPS (the policy background chapter) to suggest a change in policy stance.

So how might they now –  revisionistically – attempt to describe an “easing cycle” as having been commenced in June 2014?  Well, the only possible way they could do so –  perhaps hinted at in that phraseology “by lowering the outlook for the policy rate” –  is using a change in the forecast for the 90 day rate from the previous set of projections, in March 2014, to those in the June 2014 MPS.

But here is the chart showing the two sets of projections


The differences are almost imperceptible.  In fact, the June track (red line) is very slightly above the blue line in the very near term, and at the very end of the period the difference is that the 90 day rate is projected to get to 5.3 per cent in the June 2017 quarter rather than the March 2017 quarter.  And recall that there were no contemporary words to suggest a change of stance.

Sure enough over subsequent quarters the Bank did start to revise down the future track, but there is no evidence that over that period they thought of themselves –  or openly described themselves –  as having begun an “easing” cycle.    That didn’t happen –  and even then they didn’t think of it as a “cycle” –  until the OCR was first cut in June 2015.   Here is the Governor talking about monetary policy in a February 2015 speech.

We increased the OCR by 100 basis points in the period March 2014 to July 2014 because consumer price inflation was increasing as the output gap became positive and was expected to increase further. Since July, the OCR has been on hold while we assessed the impact of the policy tightening and the reasons for the lower-than-expected domestic inflation outcomes.

The inflation outlook suggests that the OCR could remain at its current level for some time. How long will largely depend on the development of inflation pressures in both the traded and non-traded sector. The former is affected by inflation in our trading partners and movements in our exchange rate; the latter by capacity pressures in the economy and how expectations of future inflation develop in the private sector and affect price and wage setting.

In our OCR statement last Thursday we indicated that in the current circumstances we expect to keep the OCR on hold for some time, and that future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.

Again, no sense from the Governor that he was well into an “easing cycle”, as we are now apparently supposed to believe.

Now, there is a theoretical argument that the stance of monetary policy can be summarised not just by the current OCR but by the entire future expected/intended track.  But as the Reserve Bank has often –  and rightly – been at pains to point out, projections of interest rates several years in the future contain very little information, as neither the Reserve Bank nor anyone else knows much about what will be required 2 to 3 years hence.   And it is a dangerous path for them to go down, for it invites those paid to hold the Governor to account to do so not just in respect of the actions he or she takes, but in respect of their ill-informed (but best) guesses as to what the far future of the OCR might hold.

If this is the explanation for the Reserve Bank’s words this morning –  and sadly it seems like a plausible explanation –  it is, at best, a case of someone trying to be too clever be half, and change the clear meaning of plain words (to the plain reader) in mid-stream.  At best, too-clever-by-half, but at worst a deliberate attempt to use a verbal sleight of hand to deceive readers, including the members of Parliament to whom the document is, by law, formally referred.    Sadly, it looks a lot like the “alternative facts” label –  one that should be worn with shame – might have have been quite seriously warranted.  They didn’t start easing in June 2014; at best by later that year they started slowly backing away from their enthusiasm for (a whole lot more) further tightening.

I’d hoped for better from the Reserve Bank, its Governor, incoming acting Governor, and other senior managers who may perhaps have aspirations to become Governor next March.

Lewis Carroll wasn’t intending Through the Looking Glass as a prescription for how powerful senior public officials should operate.

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”


4 thoughts on “Alternative facts: a possible interpretation

  1. It reminds me of Winston Smith working at the Ministry of Truth, in ‘1984’ …

    “The messages he had received referred to articles or news items which for one reason or another it was thought necessary to alter, or, as the official phrase had it, to rectify. For example, it appeared from The Times of the seventeenth of March that Big Brother, in his speech of the previous day, had predicted that the South Indian front would remain quiet but that a Eurasian offensive would shortly be launched in North Africa. As it happened, the Eurasian Higher Command had launched its offensive in South India and left North Africa alone. It was therefore necessary to rewrite a paragraph of Big Brother’s speech, in such a way as to make him predict the thing that had actually happened. Or again, The Times of the nineteenth of December had published the official forecasts of the output of various classes of consumption goods in the fourth quarter of 1983, which was also the sixth quarter of the Ninth Three-Year Plan. Today’s issue contained a statement of the actual output, from which it appeared that the forecasts were in every instance grossly wrong. Winston’s job was to rectify the original figures by making them agree with the later ones. As for the third message, it referred to a very simple error which could be set right in a couple of minutes. As short a time ago as February, the Ministry of Plenty had issued a promise (a “categorical pledge” were the official words) that there would be no reduction of the chocolate ration during 1984. Actually, as Winston was aware, the chocolate ration was to be reduced from thirty grams to twenty at the end of the present week. All that was needed was to substitute for the original promise a warning that it would probably be necessary to reduce the ration at some time in April.”


  2. Definitely a tightening bias in June 2014 offf the back of a disaster recovery and seasonal commodity record prices for milk which now seems rather a foolish 4 interest rate increases in a global environment of overcapacity and low inflation. NZ interest have been consistently higher than OECD average interest rates since Don Brash, followed by Alan Bollard and subsequently also with Graeme Wheeler.

    Even the current foolish macro prudential tool, 40% LVR creates a monopoly by the banks on huge numbers of borrowers unable to shift their loans as they have previously borrowed on 20% equity. A competiting bank requires 40% equity in order to enable a shift an existing banks customer. In the current period of low house price increases the 40% LVR creates absolute monopoly of a customer. Held captive, banks can increase interest rates on borrowers creating in effect another round of tightening bias while the OCR is still in a easing bias.

    The RBNZ is just too lazy and have not researched their liberal use of such massive intervention in the market.


  3. a bit of a thread hijack here…

    Michael I’d really like to understand your perspective on the Reserve Bank’s handling of its responsibilities to regulate the insurance industry.In the wake of AMI and the likely bail out of Tower there seems to be real failure on the banks part here.

    Question marks for me are around the adequacy of reserves, the culpability (if any) of the actuaries and the profit extracted during “good times”. On the face of it there does seem to be regulatory failure here and when this is combined with our weak press there seems to be little pressure to change.

    What’s your view?


  4. I haven’t been following the Tower situation at all – altho my (highly superficial) impression had been that it was also a legacy of the Christchurch quakes.

    I guess it is worth remembering the Insurance (Prudential Supervision) Act didn’t get the Royal Assent until a couple of days after the first Canterbury earthquake. So the AMI failure in particular really had nothing to do with any failings of the RB, and regulatory solvency standards for insurers were only put in place over the subsequent couple of years. Personally, I thought – and argued internally – that they were insufficiently demanding, as they did not require sufficient capital for a repeat of the Canterbury sequence of quakes at some time in the future. That might have been less concerning – caveat emptor and all that – if it had not been for the rush to bailout AMI, not just as matter of political preference, but on the recommendation of the RB and Tsy. That revealed a huge moral hazard, and reinforced the need for really high capital requirements.

    There was a real ambivalence at the RB about taking on insurance supervision. The Bank didn’t want it, but the govt wanted it done. My impression from my time at the Bank was that the staff and managers concerned were taking the new role pretty seriously. My concern – as with bank supervision actually – is that it is too easy to focus on the details of regulation, complying with international norms etc, while losing side of the bigger picture issues where there is probably more of a public policy issue, esp in light of the bailout. It is certainly a topic that would warrant better coverage in the Bank’s FSR – and perhaps with supporting research – than it tends to get.


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