In a post a couple of weeks ago I highlighted the extent to which monetary conditions appeared to have been tightening over the last few months, even as the OCR has been kept steady at 1.75 per cent. Specifically, retail interest rates (lending and deposits) have increased, and the exchange rate has risen. In addition, but less amenable to easy statistical representation, credit conditions have tightened, through some mix of Australian and New Zealand regulatory interventions and banks’ own reassessments of their willingness to lend. Over this period there has been no acceleration in economic growth and inflation (whether goods or labour) hasn’t been increasing. If anything, core measures of inflation – already persistently below target – have been falling away.
Yesterday the Reserve Bank released the results of the latest Survey of (business and economists’) Expectations. The Reserve Bank has recently changed the survey, dropping a number of useful questions altogether, and missing the opportunity to plug some key gaps (eg there are no surveys in New Zealand of expected net migration). They’ve also added some useful new questions, but for the time being are refusing to release the results of those questions – including those around OCR expectations, house price expectations, and longer-term inflation expectations.
But one set of questions I was a little surprised that they left unchanged were those around monetary conditions. I like the questions but it is a long time since I’ve seen anyone else write about the results. Respondents are asked to indicate what their perception of current monetary conditions is (on a seven point scale, where four is neutral). And then they are asked the same sort of question about expectations for the end of the following quarter and a year hence.
Broadly speaking, respondents tend to describe monetary conditions – or at least changes in them – as one might expect. Here is the perception of current monetary conditions, dating back to the start of 1999 when the OCR was introduced.
The peak in the series was right at the peak of the last OCR cycle, where the OCR was raised to 8.25 per cent. Since then, although the Governor likes to describe monetary policy as extraordinarily accommodative, respondents have never thought that monetary conditions have been (or are) anywhere as easy as they were tight in 2007/08. (When I completed the latest survey, I described current conditions as just a bit tighter than neutral.)
Note that latest observation. Respondents reckon that monetary conditions have tightened. The increase doesn’t look that large, and does come after a fall in the previous quarter. But, the larger increases tend to occur either when the OCR is actually being raised, or when the Reserve Bank is talking hawkishly about the probable need for further OCR increases (thus, you can see the two big increases in 2014, when the Bank was in the midst of what it was talking of as 200 basis points of OCR increases).
But perhaps more interesting is that respondents also expect conditions to be quite a bit tighter by the end of the year, and again by the middle of next year – and all that with no Reserve Bank encouragement at all. And – I would argue – none from the underlying economic data either.
The scale of the increase in the last few quarters is comparable in magnitude to the increase in 2013/14 when the Reserve Bank was talking up, and delivering, significant OCR increases.
Quite why respondents – completing the survey in late July – are expecting so much tighter is a bit of a puzzle. But if it isn’t down to the Reserve Bank itself, or to the underlying economic/inflation data, perhaps it is reflecting trends respondents are observing – the rising retail interest rates, high exchange rate and tightening credit conditions – and that they are assuming that those things won’t reverse themselves, and may even intensify.
Personally, I think the case for somewhat easier monetary conditions is relatively clear at present: weak inflation, unemployment still above NAIRU, weak wage inflation, and a housing market that seems weaker than the toxic mix of land use restrictions and continued rapid population growth would warrant. (To be clear, I’m not making a positive case for higher house prices inflation – though more housebuilding would be welcome – just noting that the housing market is where, if overall conditions were about right (for the economy as a whole), we should be seeing continuing high inflation.)
Against that backdrop, I think it would be highly desirable for the Reserve Bank to make the point explicitly on Thursday that the economy has not needed, and does not now appear to need, tighter monetary conditions, and that some easing would be welcome and appropriate. As I noted in the earlier post, I’m not sure it would really be appropriate for the Governor to cut the OCR – given that (a) he hasn’t foreshadowed such a move, and (b) that this is his last OCR decision. In a well-governed central bank – such as almost every other advanced country has – a change of Governor is less important: however influential the Governor’s views are, in the end he or she has only one vote in a largish committee. All the other voters will still be there the next time an interest rate decision is made.
The problems here are compounded by the (a) the forthcoming election, so that no one knows what regime (what PTA) monetary policy will be being made under in future, (b) by the fact that we only have an acting Governor – an illegal appointment at that – for the next six months, and people in acting roles are often loath to do anything they don’t strictly have to, and (c) by the lack of transparency in the Reserve Bank’s systems and processes. When, say, Janet Yellen or Phil Lowe took up their roles as head of the respective central banks we knew a lot about how they thought about monetary policy. Same goes for Mark Carney – even though what we knew about him was from another country. There is almost nothing on record as to how Grant Spencer these days thinks about monetary policy. Even if he is to operate – illegally – under a (purported) PTA that is the same as at present, the PTA captures only a small amount of what is important to know: what matters as least as much is how the individual thinks about and reacts to incoming data. With no speeches, no published minutes, no published record of the advice he has given the Governor on the OCR we know very little at all.
It is a model that badly needs fixing. We simply shouldn’t be in a position where one person holds so much power, and hence their departure leaves such a vacuum (especially when, as will inevitably happen from time to time, such changes occur around election time). We know that the Opposition parties are promising change – roughly speaking in the right direction, although the details need a lot of work – but what the National Party has in mind remains a mystery. Treasury is refusing to release any of the versions of Iain Rennie’s report on central bank governance, claiming that the matter is under active consideration by the Minister of Finance. That is a dodgy argument anyway – since Rennie’s report to The Treasury is not the same as Treasury’s advice to the Minister (something I haven’t requested) – but since they’ve had the final report for months now, it shouldn’t be unreasonable to expect some steer from the Minister as to what his response might be. As I’ve noted before, with the process of choosing a new Governor underway, at present neither candidates nor the Board have any real idea what a key aspect of the job might be.
The problems around “one man governance” aren’t restricted to monetary policy. The Deputy Governor, Grant Spencer, gave a thoughtful speech the other day on “Banking Regulation: Where to from here?”. But in a sense, the problem was in the title. The Governor personally makes the policy decisions, and the Governor is leaving office next month. Spencer will be minding the store – illegally – for a few months, and then retires early next year. As we’ve seen in the past, the particular person who holds the role of Governor can make a big difference to the character and specific direction of regulatory policy – LVR restrictions, for example, were (for good or ill) a legacy of Graeme Wheeler personally (and the earlier hands-off disclosure driven model, a legacy of Don Brash personally). So in many respects it makes no more sense for Grant Spencer to be giving speeches on “where to from here” for bank regulation than it does for Steven Joyce to give such a speech on where to from here with tax policy. In Joyce’s case, at least it is a campaign speech – he hopes to still be in place next year, whereas Wheeler and Spencer will both be gone. Neither they nor we know what their successors’ inclinations might be.
Again, that isn’t good enough. We’ve personalised control of a major area of policy, when the general practice, here and abroad, is that when technocratic agencies exercise regulatory power they do so through boards that provide considerable continuity through time. Individuals come and go, but they do so one at a time, and in a way that doesn’t dramatically change the balance of the board in the short-term. That provides stability and predictability for both the institution itself, for those we are regulated (or indirectly but materially affected by regulation) and for those – citizens – with a stake in the agency. We are well overdue for significant governance reforms to the Reserve Bank legislation. And to say that is not to criticise the individuals – Wheeler, or Spencer – who have to operate with the law as it stands it present, inadequate as it is. The responsibility for the inadequate legislation – the iunadequacies of which have been brought into sharper relief in the last few years – rests with ministers and with Parliament.
In closing, I do hope that when journalists get to question the Governor, and when later in the day FEC members get the same opportunity, they will not overlook the egregious and inexusable behaviour – not sanctioned by any legislation – by the Governor, his deputies, Geoff Bascand and Grant Spencer, and his assistant John McDermott – in attempting to silence Stephen Toplis when they disagreed with some mix of the tone or content of his commentaries on them. The intolerance of dissent, and the abuse of office, on display then aren’t things that can simply be let go silently by. I’m as appalled as anyone by the lack of contrition Metiria Turei has displayed over her acknowledged past benefit fraud. But bad as that is, abuse of high office by senior incumbents is, in many respects, a rather more serious threat. Our elites seem to have become all too ready to do hardly even the bare minimum to call out, and expose, unacceptable behaviour by the powerful. Here, we’ve seen no contrition, we’ve seen a Treasury advising the Minister to ignore the behavour, and a Minister of Finance – legally responsible for the Governor – happy to walk by on the other side, saying it is nothing to do with him.
(It was nonetheless interesting to read the BNZ’s preview pieces for this week’s MPS. Perhaps they were just chastened by the data having not gone their way, or perhaps the heavy-handed pressure from the Governor really did work, because the tone (and spirit) of these latest commentaries is very different from what we saw – and what so riled the Governor – in May. Personally, I thought – and think – that the Governor’s May monetary policy stance was more appropriate than the BNZ’s, but that isn’t the point. Our system is supposed to thrive on vigorous debate, and one isn’t supposed to lose the right to challenge the powerful just because in this case the Governor happens to regulate the organisation employing the critic.)