Something of a mixed bag

The Monetary Policy Statement was released this morning, followed by the Governor’s press conference.  It was less entertaining than I’d feared, and he mostly stayed on mandate – albeit drifting off onto answering several questions about bank conduct (with no real attempt to tie his rhetoric to the Bank’s statutory responsibilities) rather than monetary policy.  Then again, the journalists seemed to give him a fairly easy time.  I’ll come back to some of the comments and questions a bit later.

I heartily commend the Bank on one thing.  This is from the first paragraph of the MPS

The direction of our next move is equally balanced, up or down. Only time and events will tell.

That puts them in a quite different place than the financial markets as a whole, or than respondents to the Bank’s survey of expectations, where almost everyone is convinced the next OCR change will be an increase.  After my post yesterday on the Survey of Expectations, the Bank sent out to respondents their slightly more detailed report.   That showed that none of the 41 respondents expected the OCR a year from now to be lower than it is today (I do, but although I printed off a copy of my answers, I seem to have omitted to submit them).    Sure, each individual respondent will have a probability distribution around their own responses, but it is a telling contrast to the Bank that not one has a central expectation of a lower rate.  Presumably the Governor’s willingness to be so upfront about this even distribution of risks over the next year or two (albeit not substantively that different from the line the Bank has taken previously) will have contributed to the fall in the exchange rate this morning.

That said, I’d issue the same caution as I’ve made previously. The Governor claimed, in his very first line that

The Official Cash Rate (OCR) will remain at 1.75 percent for some time to come.

“Will” is a very strong statement in a very uncertain situation (domestically and globally).  Wise central bankers don’t hold themselves out as knowing more than they do.  The Governor’s hunch at present might be that the OCR won’t change for a while, but he doesn’t (and can’t) know that much, and bald statements of this sort risk leaving the Bank more unwilling to move quickly (up or down) than might prove warranted.  The contrast with the modest tone of current RBA statements is striking.

We also had an outburst of transparency. The Governor told us that the decision to hold the OCR had had the unanimous support of his Governing Committee colleagues, and his internal Monetary Policy Committee staff advisers.    It is nice of him to tell us.  Graeme Wheeler did that once, apparently to buttress the case for the move he was then making, but then adamantly refused to release the same information about other (historical) decisions –  I discovered recently that the Ombudsman is still working his way towards a decision on my request that he review Wheeler’s decision.  Perhaps the new Governor could change courses and make this information routinely available, with a suitable (but modest lag).   Disclosure of information can’t threaten the national economic interest –  Wheeler’s assertion –  just when it happens not to suit the Governor for it to be released.

There was plenty of gush about the economy.  This line took me a bit by surprise

The recent growth in demand has been delivered by an unprecedented increase in employment.

But this is the chart of the HLFS employment (corrected for the series break in 2016).


Perhaps he just meant “unprecedented” since the last growth phase?

And amid all the talk about employment –  and the welcome (overdue) focus on labour market indicators –  the word “productivity”, and the near-complete lack of any growth it over recent years, appeared not once in the text of the entire document.  Nor in the Governor’s discussion of what he saw as puzzlingly low wage inflation.

In the course of the press conference, the Governor talked about his goal being to communicate better and more widely –  not just to “four bank economists” –   and about how the Bank would have to learn to communicate in plain English.  It is a laudable goal I guess, but it did sound a lot like the lines Graeme Wheeler was using only a few years ago.  Wheeler avoided one on ones with journalists of course (at least ones that might ask awkward questions), which Orr does not seem likely to do, at least in his early stages.  But Wheeler also made much of the number of speeches he and his staff were doing up and down the country in his early years.  Communication seems easy when you are starting out, and aren’t on the back foot.

I mentioned earlier that the Governor mostly stayed on mandate in the press conference.  There were a couple of small exceptions.  The first was when he was asked about what the obstacles were in the housing market, and his first clear simple response was “lack of affordable land”.   Graeme Wheeler was simply never that clear, and it was never clear if he actually appreciated the importance of the land issue and the associated regulatory failures.  Housing policy isn’t a matter for the Bank, but it is encouraging that the new Governor appears to recognise, at an analytical level, the core failure.   The other exception, which seemed to pass unnoticed (or not followed up anyway) was when the Governor suggested that with interest rates at current levels the government should be doing more investment spending.  Those aren’t calls for the central bank, on an issue where there will considerable partisan division of views.

Two aspects of the monetary policy responses puzzled and disconcerted me.

Bernard Hickey asked the Governor what he thought of the argument that central banks should be raising inflation now, so as to raise nominal interest rates, to provide more policy leeway in the next serious recession.   Orr’s rather glib response was that “I don’t think much of it at all”, suggesting that (a) central banks should just do what is right now, and (b) that there are other tools, methods and instruments.   Which is fine except that core inflation – even in New Zealand –  has been well below target for years so that, at least with hindsight, the central bank hasn’t been doing the right thing now.  Partly as a result market measures of inflation expectations are well below target.  And there is no other country where supplementary instruments (eg QE) have been so demonstrably successful that core inflation has quickly got back to target, even in a gradual recovery phase.   The Governor needs to get to grips with preparing more seriously for the next recession.  It will be along, perhaps before too long.

Perhaps even more startling, was his response when asked a question in which it was noted that Graeme Wheeler had failed to hit the inflation target midpoint, and Orr was asked whether he would be happy to be judged on his performance against that metric.  That seemed to set the Governor off in defence of his predecessors, claiming that the economy was in near-ideal cyclical sweet spot, and that he could not imagine a better place to start from as Governor.  A bit later he chipped in that he thought the Bank had been doing a ‘remarkable” job in forecasting core inflation –  a variable that hasn’t been anywhere near the explicit 2 per cent target since that target was put in place by Bill English almost six years ago.  I wouldn’t have expected him to criticise his predecessors explicitly –  although he more or less did so when discussing communications approaches –  but surely we should have hoped that the new Governor might have regretted that inflation had so persistently undershot, and committed to do everything in his power to avoid a repeat?   His failure to do so is a little disconcerting to say the least.    Even with a focus on employment/unemployment, the Governor’s own charts suggest that the labour market was allowed to run with quite unnecessary excess capacity for several years because the Bank misjudged the extent of inflation pressures.

Once again, we have a set of Bank projections that suggest things are just about to come right.  Productivity, for example, is just about to pick up, and so is inflation.  The Bank thinks that in two years time we will be almost back to 2 per cent inflation.  The problem, of course, is that the Bank has been running the same line for years now, and it just hasn’t happened.  Partly perhaps because he embraced the record of his predecessors, the new Governor gave us no reason to be confident that this time things really will be different.  That is quite a gap.

I see that ASB, continuing the plays on the Governor’s name, deems it an “Orrsome start”.  I wouldn’t call it an “Orrful start”, but if there are some encouraging aspects, there is plenty of room for improvement.  The Governor  –  being fluent –  seems to be prone to speaking a bit more quickly than he thinks.  Over time, that won’t necessarily serve him, or the Bank, that well.     But the absence of solid answers about why this time inflation really will get back to target –  in an economy that seems unlikely to grow even as fast as (the modest rates) managed over the last few years –  remains the most obvious gap.  Perhaps MPs could consider asking the Governor this afternoon about why we should believe him and his colleagues this time?