I didn’t expect to be particularly critical of the Reserve Bank after yesterday’s Monetary Policy Statement. A journalist asked me yesterday morning what I’d say if they didn’t cut the OCR, and I noted to him that whether they cut or not, what I’d really be looking for was evidence of the Bank treating the issues in a serious way, alert to the magnitude of what was going on and the sheer uncertainty the world faces around the coronavirus.
They – the almost a year old new Monetary Policy Committee – did poorly on that score. And in his press conference, I thought the Governor simply seemed out of his depth. Much of what the Bank had to say might have seemed reasonable two weeks ago – no doubt when the bulk of their forecasts were brought together – but the situation has been moving (deteriorating) quite rapidly since then. They can’t update published forecasts by the day, but there was little sign in the record of yesterday’s meeting, or in the Governor’s remarks yesterday afternoon (or those of his senior staff), of anything more immediate or substantive. The Governor seemed to attempt to cover himself by suggesting that the Bank”s line was consistent with some “whole of government” inter-agency perspective, but….that is (or should be) no cover at all, since Treasury and MBIE don’t face the same immediacy the Bank does (it had to make an OCR decision) and whatever the Ministry of Health might be able to pass along about the virus itself, it knows nothing about economic effects. On those, the government should be able to look to the Bank for a lead. Instead, we got something that seemed consistent with the lethargic, lagging, disengaged approach of our government (political and official) to the coronavirus situation.
Thus, remarkably, faced with one of the biggest out-of-the-blue economic disruptions we’ve seen for many years, arising directly and most immediately in one of the world’s two largest economies, we get three-quarters of the way through the press statement before there is any mention of the issue, ploughing our way through upbeat commentary including on the world economy. Even when we do get there, the coronavirus effects are described only as an “emerging downside risk” – for something which has already sharply reduced activity in parts of our economy. It is the sort of language one might use for things where the effects are hard to see, not for something this visible, direct, and immediate. And on the day when the head of the WHO – who has often seemed to play defence for the PRC – was highlighting the scale of the global threat. On a day when a CDC expert was on the wires noting that the only effective response is social distancing – the more distant people stay the less economic activity there is.
The Bank loves to boast about how transparent it is. As I’ve noted, they are happy to tell us the (largely meaningless) forecasts for the OCR three years hence, but they are astonishingly secretive about their own analysis and deliberations. Thus, we now get a “summary record” of the final MPC meeting. Here is pretty much all we get to see about the coronavirus issue
The Committee discussed the initial assumption that the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration. The members acknowledged that some sectors were being significantly affected. They noted that their understanding of the duration and impact of the outbreak was changing quickly. The Committee discussed the monetary policy implications if the impacts of the outbreak were larger and more persistent than assumed and agreed that monetary policy had time to adjust if needed as more information became available.
….The Committee discussed alternative OCR settings and the various trade-offs involved.
There is no sense of the sort of models members were using to think about the issue and policy responses. There is no sense of the key arguments for and against immediate action and how and why members agreed or disagreed with each of those points. There is no sense of how the Bank balances risks, or of what they thought the downsides might have been to immediate action. There is no effective accountability, and there is no guidance towards the next meeting. Consistent with that, the document has one – large meaningless (in the face of extreme uncertainty) – central view on the coronavirus effects, but no alternative scenarios, even though this is a situation best suited to scenario based analysis. It is, frankly, a travesty of transparency, whether or not you or I happen to agree with the final OCR decision.
Consistent with that, there was no mention – whether in the minutes or in the body of the document or in any remarks from the Governor – of past OCR adjustments in the face of out-of-the-blue exogenous events. Again, perhaps there are good reasons why the cuts in 2001 (after 9/11) or 2011 (after Christchurch) or – less clearly – around SARS in 2003 don’t offer good lessons for policy-setting now. Presumably the MPC thought so, but they lay out no analysis or reasoning, and thus no way to check or contest (or even be convinced by) their thinking. It really isn’t good enough. Then again, in the press conference no journalist challenged the Governor on these omissions.
Similarly, there was no sign in any yesterday’s material or comments of having thought hard about the limitations on monetary policy (globally) as interest rates are near their effective lower bound. All else equal, and with inflation well in check, that starting point should typically make central banks more ready to react early against clear negative demand shocks to do what can be done to minimise the risk of inflation expectations dropping away. Perhaps again it still wouldn’t have been decisive this time – and our Reserve Bank still has a little more leeway than many – but to simply ignore the issue, and show no sign of having thought hard about the wider policy context, was pretty remiss.
From his tone in the press conference, it was as if the Governor really didn’t want monetary policy to have to play a part – to do his job – as if it was all just an unfortunate distraction from good news stories he’d been hoping to tell. So he told one journalist that at best monetary policy would be a “bit player”: for individual sectors that is no doubt true (but then monetary policy is never about dealing with specific sectoral problems), but not really the point, since there has been a clear and significant, highly observable negative demand shocks, and a huge increase in uncertainty (often a theme of RB speeches etc over the last year). In fact, in answer to another question the Governor was heard claiming that there was “no specific event” to consider reacting to (hundreds of millions of people locked down in China, second-largest economy in the world?) and – worse – then claimed that there was no need to act as we already have very low and stimulatory interest rates. The problem with that argument is that they were just as low six weeks ago, and since then we’ve had a clear large negative demand shock.
Asked about the fact that implied long-term inflation expectations (from the government bond market) were barely above 1 per cent, the Governor took a lesson from politicians and simply refused to answer the direct question. He then went to on to claim that the monetary policy foot was already on the accelerator, that we’ve had more positive global growth – even as global projections are in the course of being revised down – and that if anything the question that should have been being asked was why we weren’t thinking about raising the OCR (“renormalising”).
One journalist thought to ask the Governor about the difference between the Bank’s GDP forecasts for the year ahead (2.8 per cent I think I heard) and those of various outside commentators (more like 2.0 per cent) and asked about the difference. The Governor’s response was that of glib teenager: “0.8 per cent I think”. Pushed a bit further, he indicated that he had no idea why the difference and (more importantly) no real interest. He claimed (fair enough) not to accountable for anyone else’s forecasts, but showed no interest in the cross-check (that used to be pretty standard around the MPC table) of understanding why the Bank is different from others, and why the Bank still thinks that is the best forecast.
There was also the line about market prices constantly adjusting and buffering……all this as the exchange rate rose the best part of 1 per cent on his announcement yesterday, rather undercutting any exchange rate buffering of the economy that had been underway.
Oh, and then we had gung-ho political cheerleading for the government’s infrastructure spending plans. He claimed to be “very excited” by it and rushing past any issues around “crowding out” was keen to talk up all the possibilities of “crowding in” accompanying new private sector investment etc. No evidence, no analysis, but it probably went down well with the Labour Party. Sadly, the Governor seems to do campaigning and cheerleading better than he does monetary policy, and there seems to be no serious and substantial figure on his team to compensate for those weaknesses (while, as far we can tell, the invisible unheard external MPC members just function as ciphers and political cover).
As an illustration of what the Bank simply seemed to be missing – or choosing to ignore – a reader left this comment here last night
The shock from nCoV isn’t just confined to China. It’s spilling rapidly across the Asia-Pacific region…
I have just spent the past few days in Singapore and I write this on a flight to Hong Kong, which is maybe 15% occupied. Singapore is shutting down, which is worrying given its entrepôt status. Malls are emptying, as are hotels and restaurants. Traffic is thin. Companies are rolling out their business continuity plans which will further exacerbate the dislocation. This isn’t about just China, it’s region-wide.
The same reader sent me directly a photo of one of Changi airport’s main terminals at lunchtime yesterday, with this note “Changi T-3 unloading zone. Today, 12 noon. Not a soul in sight.. no cars no people..”
I noted yesterday that more or more people would be cancelling trips, business or leisure, in the face of some mix of risk aversion and sheer uncertainty. That happened to me yesterday – less about immediate threat than about the extreme uncertainty about the environment a few weeks hence.
And this morning we hear a local public health expert calling for our sluggish government to expand travel restrictions to people coming from various other countries (including Singapore and Hong Kong) where there is now established community outbreak. Or news of major international events in Hong Kong being cancelled. Or a major world telecoms convention in Barcelona being cancelled.
I’m not suggesting the Reserve Bank should have tried to turn itself into disease experts or even to pin their colours to a different central scenario. But they simply don’t seem alert to the magnitude of what is already going on, including that huge rise in uncertainty, and they provided us with very little useful analysis about the way they think about monetary policy, demand shocks, risks, instrument stability etc – nothing to give us any confidence in their stewardship.
Oh, and you’ll recall I mentioned yesterday their interesting – and potentially positive – experiment in transparency, inviting real-time questions to the Governor during the press conference via Twitter. As I’d noted in advance, one might well be sceptical about just which questions they would choose to answer. Actuals were even worse than my expectations. The Bank’s comms guy had clearly been primed not to expose the Governor to any searching questions, and only two were let through at all, essentially translated into patsy questions, allowing the Governor to wax eloquent on a couple of favoured themes. No one forced them to adopt this particular approach to being more open. But if they want kudos for it, they need to be seriously willing to allow real and searching questions to the Governor.