Back in November 2017, just after the government took office, the Reserve Bank in its Monetary Policy Statement identified various assumptions they had made about the impact of various of the new government’s policies. Some of these assumptions made quite a difference to the outlook, but no analysis or reasoning was presented to give us any confidence in the assumptions they were (reasonably or unreasonably) making. One of those new policies was KiwiBuild.
Seeing as the Bank is a powerful public agency, it seemed only reasonable to request copies of any analysis undertaken as part of arriving at the assumptions policymakers were using. The Bank refused and many many months later the Ombudsman backed them up (if ever there was a case for an overhaul of the Official Information Act, this was a good example). The Ombudsman did point out that he had to rule as at the date the request had been made. So, a year having passed, I again requested this material. The Bank again refused (and I haven’t yet gotten round to appealing to the Ombudsman). Quarter after quarter the Monetary Policy Statements talk about KiwiBuild, but we’ve never seen any supporting analysis. A state secret apparently.
Until yesterday that is. In the latest Monetary Policy Statement there was the usual discussion of KiwiBuild – potentially a big influence on one of the most highly-cylical parts of the whole economy – but there was also a footnote pointing readers to an obscure corner of the Bank’s website, and a special background note on KiwiBuild, and the assumptions the Bank is making. All released simultaneous with the statement itself. See, it just wasn’t that hard. And has the sky fallen?
(As it happens I remain rather sceptical of the assumption that KiwiBuild is going to be a significant net addition to total residential investment over the next decade. Why would it, when the main issues in the housing market are land prices and, to a lesser extent, construction costs, and it isn’t obvious how KiwiBuild deals with either of them? If it proves to be a net addition, it will probably be because it is a subsidy scheme for the favoured – lucky – few.)
As for the overall tone of the monetary policy conclusions to the statement, count me sceptical. At one level it is almost always true that the next OCR move could be up or down – and in that sense most forecasting (especially that a couple of years ahead) is futile: useless and pointless. But for the Governor to suggest that the risks now are really even balanced, even at some relatively near-term horizon, seems to suggest he is falling into the same trap that beguiled the Bank for much of the last decade; the belief that somewhere, just around the corner, inflation pressures are finally going to build sufficiently that they will need to raise the OCR. We’ve come through a cyclical recovery, the reconstruction after a series of highly-destructive earthquakes, strong terms of trade, and a huge unexpected population surge, and none of it has been enough to really support higher interest rates. The OCR now is lower than it was at the end of the last recession, and still core inflation struggles to get anywhere 2 per cent. There is no lift in imported inflation, no significant new surges in domestic demand in view, and as the Bank notes business investment is pretty subdued. Instead actual GDP growth has been easing, population growth is easing, employment growth is easing, confidence is pretty subdued, the heat in the housing market (for now at least) is easing. Oh, and several of the major components of the world economy – China and the euro-area – are weakening, and the Australian economy (important to New Zealand through a host of channels) also appears to be easing, centred in one of the most cyclically-variable parts of the economy, construction. It was surprising to see no richness or depth to any of the international discussion – and to see the Bank buying into the highly dubious line that any slowing in China is mostly about the “trade war”. Few other observers seem to see it that way.
From a starting point with inflation still below target midpoint after all these years, it would seem much more reasonable to suppose that if there is an OCR adjustment in the next year or so, it is (much) more likely to be a cut than an increase. Time will tell, including about how long the 1.5 per cent lift in the exchange rate will last.
Commendably, the Bank is now talking openly about many other economies have limited capacity to respond to a future serious downturn. That is welcome acknowledgement, but it would count for more if the Bank were taking seriously the real (if slightly less binding) constraints New Zealand will also face in the next future serious downturn.
A couple of other things in the document caught my eye. One was this chart
The Bank seems to be trying to tell us that it really has no idea whether the unemployment was above or below the NAIRU at any time in the last 17 years. I don’t suppose in practice they operate that way, but when they present a chart like this it is a bit hard to take seriously the other bits of their economic analysis.
The other specific was some rather upbeat comments on productivity performance in recent years, which has led the Bank to the view that they now to expect no acceleration in productivity growth in the years ahead. The Governor always seems to err on the (politically convenient) upbeat side. I’m not sure quite how the Bank derives their productivity measure – I’m guessing as some sort of per person employed measure – but as a reminder to readers here is the chart of real GDP per hour worked, the standard measure of labour productivity. To deal, to some extent, with the noise in the individual series, I use both measures of quarterly GDP and both (HLFS and QES) measures of hours.
There has been no labour productivity growth for the last three or four years, and little for the last six or seven. I wouldn’t be surprised if the Bank is right to expect no acceleration (on current policies), but if we keep on with near-zero labour productivity growth it is a rather bleak prospect for New Zealanders.
A great deal of the press conference was taken up with questions – generally not very sympathetic – about the Governor’s proposals to increase substantially capital requirements for banks. In the course of the press conference he and Geoff Bascand made some reasonable points – including about the merits of putting the big 4 banks and the smaller banks on a more equal footing in calculating requirements – and at least fronted up on the other questions. It is just a shame this was being done reactively now, rather than pro-actively when the proposals were first released in December.
I remain rather sceptical of the Bank’s case – in which everything is a win-win, in which the economy is safer, more prosperous, and even with lower interest rates. If you doubt that I’m characterising their bold claims correctly, this is the stylised diagram that leads the consultative document.
It is a free lunch they are claiming to offer. I suspect few will be convinced.
In the course of the press conference, the Governor asserted that the Bank’s proposals will, if implemented, mean that future capital ratio requirements would be “well within the range of norms” seen in other countries. I found that a surprising claim, and there is nothing – not a word – in the consultative document to back it up. If true, it would be material in thinking about the appropriateness of the Bank’s proposals. But where is the evidence (granting that this is something that can’t be answered in a ten second Google search)? I’ve lodged an Official Information Act request for the analysis the Governor is using to support his claim. It would, surely, be in his interests to have such analysis out there.
Also at the press conference, there was the hardy perennial claim that inflation expectations are “well-anchored” at 2 per cent, and everyone believes that monetary policy is just fine. As my hardy perennial response, here are inflation breakevens from the government bond (indexed and conventional) market. The last observation is today’s data.
People with money at stake don’t seem to believe you Governor. Last time things got this low a series of OCR cuts only helped, at least partially, rectify the position.
And, finally, who does the Bank suppose gets any value at all from the cartoon version of the statement? For example
Is the Monetary Policy Statement now a set text in intermediate school? If the kids are especially naughty do they have to read it twice? Even your average MP, sitting on the Finance and Expenditure Committee and supposedly holding the Bank to account, has to be able to cope with a little more than that. I’m not expecting much of the new statutory MPC, but perhaps they could prevail on the Governor to drop the cartoons and simply write in reasonably accessible English?
Later this morning we get the Remit (PTA replacement) and Charter for the new Monetary Policy Committee. I’m sure I’ll have some thoughts about them tomorrow.