I may well have more to write about the Reserve Bank announcement this morning after the Governor’s press conference at 11am – which I hope begins with a formal apology from him and Hawkesby for their appalling complacency and minimisation of the issues as recently as a few days ago – but these are some initial reactions.
I guess I have three key points:
First, a 50 basis point was warranted at the time of the last MPS (and doing so would have been entirely in line with past practice of reacting to out-of-the-blue shocks) so 75 basis points now is seriously inadequate. Everything has got a great deal worse since then including – though not mentioned in the statement – medium-term inflation expectations.
Second – and this was the mindblowing bit to me – was this extract from the minutes
Staff also advised that an OCR of 0.25 percent was currently the lower limit, given the operational readiness of the financial system for very low or negative interest rates.
This is simply inexcusable if true (which it may not be). As just one small point, I lead a working group at the Bank in 2012 – height of the euro crisis – which identified then the need to ensure, as a matter of urgency, that banks and the RB itself were able to operate with modestly negative interest rates. And for years we have seen various other countries operating with negative policy rates, so if the Bank has not been taking action to ensure the system could operate, when needed with negative rates it is simply an inexcusable failure. For which, frankly, heads should roll. Neither when they put out their Bulletin article two years ago nor in the Governor’s speech last week was there any suggestion that negative rates could not be used now. Best surmise, they simply weren’t taking things sufficiently seriously until the last few days.
And, third, they have basically conceded that it is game over and that monetary policy has reached current limit (which is so wholly because of their failures – on this narrow point and, like most of their peers, dealing more decisively with the near-zero lower bound.
Note that as part of their statement they formally rule out any further changes – including cuts – for at least the next 12 months. In other words, tbey rule out taking urgent action now to remedy their past failures. Simply extraordinary. I guess climate change and the like were taking priority for the Governor and his staff?
But the point I also wanted to focus on was this bit of the resolution.
Agree that Large Scale Asset Purchases of New Zealand government bonds would be the best additional tool to provide further monetary stimulus in the current situation – if needed.
I never got round to writing about the substance of the Governor’s seriously inadequate speech last week, but had I done so one of the points I would have made was that outside immediate financial crisis conditions – not NZ now – these asset purchase routes simply did not offer much. It isn’t as if bond yields are now at the still-high levels they were in most countries in 2009 even after the OCR had been cut (even if they have been rising in the last few days as the global rush to cash has taken hold).
You might doubt my interpretation – but you really shouldn’t as it is pretty widely shared, even if often in muted language – but, as it happens, we have the word of one of the MPC members for it. Again, I’d been meaning to use this in a fuller post this week. I hadn’t seen this quote elsewhere, but in his column in Friday’s Herald Brian Fallow reported the RB Chief Economist Yuong Ha as saying, of the unconventional options,
“they give you a little more headroom, a little more more and space”
Precisely. And “just a little more” is not what the occasion demands.
In effect, in this announcement it is a case of “one and done” – not in sense of “we”ll be bold and not need to move again” – sort of their justification for the 50 point cut last year – but “we’ll move now, and then……well, we have to retire from the field and stare into the macro/monetary abyss….because we spent years just not doing our job, distracted by all sorts of pet things, always looking for rates to rise (as recently as the last MPS).
It really is inexcusable. Personally I think there is a strong case for dismissing the Governor, and probably most of the MPC too – including those externals we’ve never heard a word from to explain or justify their collective inaction and failure of preparedness. I don’t suppose it will happen, but it is what often does – and should – happen after battlefield disasters and revealed gross failures of preparedness. Then again, to act would be for the Minister of Finance to concede some of his responsibility – he appointed them, he is supposed to hold their feet to the fire, hold them to account. And only a few months ago in a letter to me he indicated how satisfied he was with the Governor’s stewardship.
I plan to have a fuller post this afternoon on some ideas for macro management now and in the months ahead. As I’ve said in posts last week and on Twitter, now isn’t the time for stimulus per se – new spending by the public isn’t the goal as the economies of the world deliberately de-power. The immediate focus has to be income support, the health system, and then some assurance about the framework to see us through the period – perhaps protracted – until genuine stimulus becomes the appropriate focus.