There were some good aspects to yesterday’s Reserve Bank Monetary Policy Statement:
- the Bank has abandoned its long-running over-optimism about future productivity growth and has thus revised down its estimates of potential (GDP) growth to more reasonable rates. Nothing in the economic strategy – this government or its predecessor – seemed set to deliver better, and it is good that the central bank has stopped spinning candy floss numbers (at least on that count),
- the Governor also seemed less effervescent, and perhaps consistent with the previous point there was little or no spin about just how well the economy was doing,
- in the document there weren’t even further direct calls for more government spending/borrowing. This change was defended on the grounds that the message had already been given, but I doubt that was all there is to explain the change (having said something once, even loudly, rarely discourages central banks from saying them again),
- oh, and the folksy Maori salutations at the start of the main statement – beloved by the tree-god Governor when it was his statement alone – seem to have quietly disappeared. Perhaps we might hope for the eventual quiet discontinuance of the cartoon version of the statement too?
But that was about all that could be said for it.
The document itself was weak on substance, building on consistently poor (largely non-existent) communications from the Bank.
You can tell that there are problems with communications when the Governor is reduced to repeating (numerous time in the parts of the press conference I saw) “we are trying to be as transparent as possible”. He isn’t seriously trying, and certainly isn’t succeeding. We’ve not yet had a serious speech on the economy and monetary policy from the Governor, after seven months we’ve heard not a word from four of the MPC members (including all the externals), background papers aren’t released even with a long lag, the MPS documents themselves offer ever-less insight or sense of how (or even whether) the MPC thinks in depth about the economy, and the Bank holds data close to its chest when it could release it more promptly (asked about this latter point yesterday the Governor did undertake to review their practice).
When two successive MPS OCR wrongfoot those paying closest attention to the data and to the Bank, it suggests the problem is with the Bank, not the observers. It would be interesting to know what advice the Bank’s financial markets staff gave the MPC about the market movements that were likely to occur as a result of yesterday’s decision.
It was only a few weeks ago that the Assistant Governor, Christian Hawkesby, gave a speech on central bank communications, probably mostly trying to fend off criticism of how they’d done in August. In that speech he highlighted – and overstated, at least in practical terms – the risks if central banks do what markets expect them to do
In this scenario there is a danger that markets end up paying too much attention to our communications for what we have said ‘we will do’, leaving no one left to analyse the incoming economic data for what ‘we should do’. As a central banker, I am far more interested in listening to what ‘we should do’.
And yet, yesterday’s MPS suggested that Hawkesby and his colleagues actually had no interest in that perspective either. As I noted in yesterday’s post, the MPC has had available to it throughout its deliberations the results of the Bank’s survey of expectations, the macro views of several dozen informed observers of the New Zealand economy. I wrote about the results yesterday. Those respondents expected the Bank to cut yesterday (and again next year) and even so they didn’t expect two-year ahead inflation to get above 1.8 per cent and expected no rebound in GDP growth either. Implicit in those numbers (and consistent with the mandate given to the MPC by the government) is a pretty clear view that the Bank should have cut the OCR, and should probably do so again next year. The Bank, apparently uninterested, chooses to ignore this weight of opinion and runs with its own idiosyncratic view that even with higher interest rates they were still get the growth rebound the outside observers couldn’t see (either three weeks ago when they completed the survey or – judging by comments from market economists in the last day – now). In the end, the MPC is charged with making decisions, but having got things wrong – below target inflation – for the last decade, the onus is surely on them to explain why they (mostly non-experts themselves) are so willing to back an away-from-consensus call. But they made no effort to.
In fact, if you started into the document without knowing the bottom line you’d think the case for easing yesterday was pretty unambiguous. They told us that the economy had slowed and risk were to the downside, the world economy was slowing, inflation expectations were very low and/or falling and, of course, core inflation was below target. And all that without even so much as a single mention – in the entire document, includung the minutes – of the apparently significant tightening in credit conditions respondents to their own credit conditions survey were foreshadowing, those same respondents having highlighted regulatory changes (ie most likely the coming big increases in minimum capital requirements) as a big issue.
Or perhaps the MPC is back to thinking that credit conditions really don’t matter at all? Surely, either way it would be reasonable to explain their perspective. Instead they seem to have simply ignored the issue (or tried to pretend the Governor’s whim wasn’t an issue – I heard Hawkesby on the radio this morning saying they had in fact taken account of credit conditions issues, in which case the OCR decision is still more mystifying, and the absence of any reference in the official documents looks even worse).
One of the disappointing features of yesterday was that there were signs of the Wheeler Reserve Bank returning. Under the former, not widely lamented, Governor we heard endlessly from the Bank about how stimulatory monetary conditions really were – even as inflation just kept on falling below their forecasts. There was a lot of that line yesterday. As then, so now, the Bank does not have a good read on where the neutral interest rates are, and the best guide is really something like the rear-view mirror: all else equal, look at what is happening to demand (and early indicators like business activity measures) and inflation. In the Wheeler years, there was also a strong tendency to constantly be focusing on the merest hint that something might be picking up, because of the strong belief (see above) that conditions were “highly stimulatory”. It was all rather circular – we think we are right because we think we are right. There was quite a bit of that sort of flavour in yesterday’s statement too: both the forecast pick-up in growth (that few other observers appear to believe) and the repeated mysterious suggestions that inflation itself was picking up now.
In the MPS the Bank shows five core inflation measures, and also highlights as a preferred measure the (highly persistent and stable) sectoral core factor model measure
Across the wider suite of measures, there has been no lift since 2016. And the sectoral core factor measure has been flat at 1.7 per cent for more than a year. And core inflation is a lagging indicator in a climate where (to quote the Bank) the New Zealand economy has been slowing and the world economy has been slowing).
What about core non-tradables inflation? The headline non-tradables inflation rate did rise recently.
The blue line is an official SNZ series, while the orange line in an RB series. Again, no sense of any pick-up in core domestic inflation pressures – and nor, really, would one expect there to be in an economy where activity growth has slowed, unemployment has levelled out, confidence is low, policy uncertainty is quite high, and inflation expectations (remember them) are low.
In short, there was a (welcome and overdue) pick-up in inflation a couple of years ago, but there is no sign it is continuing. And – since the OCR cuts this year were against the backdrop of materially deteriorating fundamentals – there isn’t much reason to expect further increases in inflation from here on current policy (perhaps especially not when credit conditions are tightening, and RB announcements are pushing up interest and exchange rates).
Incidentally, one line – used several times yesterday – that you shouldn’t be fooled by was the one that “the projections were consistent with either choice – a cut or leaving the OCR unchanged”. Well, of course……. Unless practice has changed very very markedly from the way things were when I was closely involved in these processes, the final projections track – especially the interest rate track – is tailored to be consistent with the policy options and messages the decisionmakers (in my day the Governor, these days – at least on paper – the MPC) want to send. If the MPC wasn’t clear in its own mind last week what it was finally going to do, they’d prudently have ensured that the final track was consistent with either option. If they’d been clear but wanted to send a message that they’d been open to a possible cut, they have done the same thing. There is no independent evidence or perspective in (the first few quarters) of that track.
I want to circle back to the claims around the (asserted) high degree of transparency. One of the innovations in the new monetary policy governance model is the publication of the summary record of the meeting (aka “minutes). These are typically a bit longer than the initial policy announcement statement itself, and do provide the opportunity to note a few issues there wouldn’t otherwise be room for. But they are proving even less enlightening than one might have feared (given the way the Governor and the Minister got together to oppose a more genuinely open model, of the sort seen in central banks in places like the US, the UK, Japan, or Sweden).
Here are four examples from yesterday’s minutes. First, fiscal policy
The Committee discussed the impact of fiscal stimulus on the economy. The members noted that fiscal stimulus could be greater than assumed. The members also discussed the potential delays in implementing approved spending and investment programmes.
So far, so banal. As I noted earlier, in the official documents the Bank was back to staying in its line re fiscal policy (as the Governor said, “we take fiscal policy as announced and run on that basis” – which is how things are supposed to work). And yet this morning on Radio New Zealand Christian Hawkesby was heard stating that “we think more fiscal spending would be helpful in stimulating the economy”. If that is the Committee view, why isn’t it in the MPS or the minutes, if it was substantively discussed why isn’t it in the minutes, and if it is true then – given that the, as the Governor said, the Bank takes fiscal policy as given – isn’t Hawkesby’s statement further evidence that they should in fact have cut the OCR yesterday (if they think the economy needs more stimlus, and they are responsible for deploying the primary counter-cyclical tool)?
Then, the work programme on how the Bank might handle reaching the limits of conventional monetary policy
The Committee noted the Bank’s work programme assessing alternative monetary policy tools in the New Zealand environment, as part of contingency planning for an unlikely scenario where additional monetary instruments are required.
A statement which tells readers precisely nothing (especially as it is now three months since the Governor told a press conference that the work then was “well-advanced”). As it happens, reality seems a bit better than the minutes imply because when he was asked about this work programme yesterday and bringing it to light, the Governor revealed that they will release a document on frameworks and principles in the new year, and will (he says) be keen on feedback and discussion. That sounds more promising, but then where does the MPC fit into all this given the unrevealing comment from the minutes (and there are longstanding doubts about just who has power over any unconventional instruments – whether the MPC will get much say at all)?
Then we are told they had a discussion on an important immediate policy issue
In terms of least regrets, the Committee discussed the relative benefits of inflation ending up in the upper half of the target range relative to being persistently below 2 percent.
But that’s it. We are given no insight into the arguments deployed, the competing cases made, or the conclusion. Given their OCR decision we are left to deduce that the Committee would be quite worried indeed about (core) inflation getting above 2 per cent. But we are given no hint of why – despite 10 years now below that midpoint. And this is what the Governor calls being as transparent as possible?
And finally, the OCR decision itself
The Committee debated the costs and benefits of keeping the OCR at 1.0 percent versus reducing it to 0.75 percent. The Committee agreed that both actions were broadly consistent with the current OCR projection. The Committee agreed that the reduction in the OCR over the past year was transmitting through the economy and that it would take time to have its full effect.
And, again, that is it. No hint of the competing arguments – which could readily be done without identifying individuals – and no hint of why they chose to come down where they did? What were the key costs the Committee saw to cutting the OCR (especially when both market expectations and observer implict recommendations were to cut). There is no insight into the current decision or, importantly given the absence of speeches etc, no insight into the reaction functions/loss functions members (individually or collectively are using). It simply isn’t very transparent at all. The mantra overnight “just watch the data, just watch the data” isn’t really much use at all – especially when the MPC is going to run with such a non-consensus view of the data (and/or the risks around policy reactions).
It is all pretty underwhelming and confidence-draining. The point isn’t that a huge amount macroeconomically hung on any specific OCR decision. Nor for now is the economy in cyclical crisis – we aren’t in recession, inflation isn’t falling away sharply. The concern is that we have a central bank led by pygmies (no offence to the central Africans). Not one of the MPC members – all of whom are probably pleasant people (even the Governor if people aren’t challenging him) – command any great respect for their insight into the economy, their judgement or intellectual leadership, or for their willingness/ability to communicate a persuasive story or a sense that they themselves have a good and robust framework for thinking about the economy. In the case of the Treasury observer – who gets to participate not vote – it might have been her first ever significant meeting on advanced economy macro issues, but in the end responsibility rests with the voting members. They are failing us, corralled by the unconvincing Governor. Having substantially surprised the market (deliberately and consciously so) two MPSs in a row, and chosen to ignore consensus opinion on likely economic developments, you’d have thought we’d be hearing a lot from the MPC members – minutes that clearly outlined the issues and judgements, speeches articulating mental models and perspectives on the New Zealand economy, wide-ranging interviews (of the sort senior Fed officials give). Instead, we have weak official stories (the MPS), unrevealing minutes and – seven months into the new model – not a word in public from any of the external members nor from the Bank’s chief economist.
It isn’t good enough. The Bank’s Board should be demanding better, as should the Minister of Finance (including when he comes to appoint new Board members and the Board chair in the next couple of months). Transparency and communications aren’t about publishing forward tracks – one of the Bank’s own recently-departed researchers published research last year suggesting they make little difference – but about open and honest engagement, laying out the uncertainties and (inevitable) differences of possible perspective in a business characterised by so much uncertainty. How decisionmakers demonstrate that they handle uncertainty, competing narratives and even disagreement, is the sort of thing that helps build confidence, not rote publications (let alone poor, surprising, decisions) or Soviet-style phalanxes of grey bureaucrats all lined up with the Governor.
You might think I sometimes put things fairly strongly (if often at considerable length). I wouldn’t have wanted people to miss this comment on my post left by a banker. It was both strident and succinct.