Central bank watch

Our Reserve Bank has been all over the place on monetary policy going back to last year.

There was the totally out-of-the-blue 50 basis point OCR cut last year.  It may or may not have been substantively justified, but they never had a compelling rationale at the time and were reduced to dreaming up (quite reasonable) stories after the event.    The concern about minimising the risk of falling expectations was one of those stories –  good, but clearly an ex post rationalisation (since all the contemporary statements made little or no mention of the issue).

In the wake of that cut, the Governor gave quite a few interviews.  One of the most substantial was with Newsroom’s Bernard Hickey (there is a full transcript at the link).   In that interview – barely eight months ago –  we learned that the Governor had no particular qualms about a negative OCR and in fact preferred that options to large-scale asset purchases (“QE”)

The effectiveness of interest rate changes, even into negative territory, made it preferable to other types of policies such as quantitative easing, which is where central banks invent money to buy Government bonds to force down longer term interest rates.


Probably the most effective and simplest one is having negative interest rates – so, bizarre as that seems, it still operates the same difference around the shape of the yield curve, and it makes people either bring spending forward or delay spending: it’s just zero – around negative sides. It also makes people think much harder about alternative investments: so, it makes them think about putting their capital to work outside of just a bank deposit. And that is, again, another positive reason for monetary policy.

We also heard from the Governor about the importance of keeping inflation expectations up (ex post rationale for the 50 basis point cut).

We’ve spent a lot of time around, I suppose, regret analysis, and I spoke about – you know, in a year’s time looking back, thinking ‘well, I wish I had done what?’ And I thought it’s – I would far prefer – and the committee agreed – far prefer to have the quality problem of inflation expectations starting to rise and us having to start thinking about re-normalizing interest rates back to, you know, something far more positive than where they are now. And that would be, you know, it would be a wonderful place to have regret relative to the alternative: which would be where inflation expectations keep grinding down.

It was a really substantive interview –  much more so than any speech or other interview the Governor has given on monetary policy in his time in office.   Much of it was explicitly focused on options if conventional monetary policy reached its limits.  So you might reasonably have supposed that this sort of thinking would still have been the sort of framework the Governor had in mind when a really severe crisis began to unwind only a few months down the track.  And, specifically –  given the gung ho comments on a negative OCR –  you’d have taken for granted that the Governor had assurred himself that all relevant systems were ready to cope with a negative OCR.

More fool you (or me) then.

But on negative interest rates, it wasn’t just a one-off comment.     When this crisis was already well upon us –  on 10 March in fact –  the Governor gave a speech outlining the Bank’s monetary policy options.   As I wrote at the time, he was astonishingly complacent that day, but set that to one side for the moment.  In his discussion of options there was no hint at all that a negative OCR was about to ruled out of consideration, let alone of the argument he was shortly to fall back on that it couldn’t be done because (some) banks “weren’t ready”.   In fact when I saw this item in the table in the speech, I nodded approvingly (especially, in fact, about that second sentence).

Negative OCR

Reduction of the OCR to the effective lower bound (the point at which further OCR cuts become ineffective), which may be below zero. The Reserve Bank could consider changes to the cash system to mitigate cash hoarding if lower deposit rates led to significant hoarding.

In that speech incidentally, the Governor promised that the Bank would be releasing a series of technical working papers on the options over the following weeks.  As yet, we’ve seen nothing; not a shred of supporting analysis for the choices the MPC has ended up making.   Consistent with the balance in the speech, on 13 March the Bank’s chief economist was quoted in the Herald stating that asset purchases etc weren’t that much of a substitute for interest rates, but just give “give you a little more headroom”.

But by 16 March the MPC finally, quite belatedly, cut the OCR, but it was a mystifying “one and done” strategy.  A 75 point cut was all well and good, but suddenly  we had a floor being put in place on the OCR: not at the sort of negative levels several other central banks had gone to, not even at zero, but at 0.25 per cent.

And, the Monetary Policy Committee agreed to provide further support with the OCR now at 0.25 percent. The Committee agreed unanimously to keep the OCR at this level for at least 12 months.

And not a shred of substantive analysis for this position has been published.  All we get from the Bank is the bland assertion that (not all) banks were ready for negative interest rates (not even clear whether the problem is the wholesale rate –  the OCR –  or retail rates which are typically still well above zero)…..and (not having put any pressure on banks to be ready in the preceding years) they now don’t want to trouble the banks.  I’m sure there are myriad businesses across the country that today wish they hadn’t been troubled by regulatory interventions (let alone viruses).  But the Reserve Bank has suddenly become solicitous of the banks, in utter disregard of their statutory mandate, which focuses not on the convenience of banks but on price stability and employment.  In the face of the unfolding huge slump in economic activity and demand.

Within days, the MPC had lurched into a very large announced programme of buying conventional government bonds, supplemented further this week (more questionably) by huge purchases –  relative to the size of the market –  of local authority debt.

I’m not suggesting that the bond purchase programme was inappropriate given the MPC’s refusal to cut the OCR.  It is the sort of climate in which, all else equal, one might expect an upward-sloping yield curve to steepened.   But had they been willing to cut the OCR aggressively, including signalling action on the notes constraint, there would have been much less need to announce a bond-buying programme.  And, more importantly, real and substantial relief would have been provided to floating rate borrowers, redistributing income from floating rate depositors/funders (ie the way monetary policy usually works).  All else, the exchange rate would also have fallen….again, a typical part of how monetary policy works.   As it is, the announced bond-buying programme has, more or less successfully, capped the rise in government bond yields.  That is a gain worth having, been it falls a long way short of lowering interest rates across the board –  in the face of a simply unprecedented economic slump.  I’m pretty sure that no other central bank in history, with a floating exchange rate, has ever pledged not to cut interest rates into a deepening slump, no matter how bad things get.  But that’s the Orr Reserve Bank for you, accommodated by the Minister of Finance and his appointeee as chair of the Bank’s Board.

There has been a fair bit of commentary from the Reserve Bank over the last few weeks, some of it just weird (the Governor on Stuff last Sunday), others fairly routine.  What is worth noting is that not once, not in a single communication from any of the Monetary Policy Committee (whether the four internals who speak, or the three internals who stay silent and seem to avoid all scrutiny from the media). has there been any mention of falling inflation expectations, as a risk that needs to weigh highly with any central bank faced with a deflationary shock and a reluctance to cut interest rates further.  To the extent that expectations fall –  and they have been, on both market and survey measures – real interest rates start rising.  And that is the exact opposite of what the situation demands.  But, of course, the MPC has offered no analysis or commentary on why they are now so unconcerned about something that, when simply hypothetical, the Governor seemed very concerned about just a few months ago.

But I wanted to jump forward to a succession of comments this week from the second tier internal MPC members, Assistant Governor Hawkesby (Orr’s chief deputy on matters macro and markets) and Chief Economist Ha.

On Monday, Ha told Bloomberg (written responses to written questions)

“The OCR can technically be taken lower, but as outlined in the Unconventional Monetary Policy principles and tools document, we would assess the effectiveness, efficiency and an impact on financial system soundness of doing so,” he said. “That would also take into account the operational readiness of the banks’ systems to implement a lower OCR.”

Asked if the OCR could be lowered in increments of less than 25 basis points, he said adjustments have to strike a balance between making changes meaningful — “will it translate into changes in rates faced by New Zealanders” — and avoiding excessive fine tuning from smaller moves.

“We also have to avoid unnecessary volatility in interest rates and exchange rates in setting monetary policy,” Ha said. “International practice has largely settled on 25 basis point increments as a minimum.”

A lot of that made no sense at all –  especially the bit about avoiding volatility – but sadly the Bloomberg journalist doesn’t seem to have asked (a) why the Bank never ensured banks were ready, (b) the exact nature, and scale, of the technical constraints (is this one small bank or ten; is it wholesale or retail?) and seemed content just to report the Bank’s lackadaisical approch – never mind the economy, don’t bother the banks.

Then Bloomberg get a real interview with Hawkesby. Here were his comments on this issue

Asked about cutting the official cash rate further below its current level of 0.25%, Hawkesby said banks weren’t operationally ready for negative rates and the RBNZ had given them an assurance that was off the table for the time being. However, the central bank was “open minded” about a negative OCR, he said.

“There could well be point down the track, where time passes, that we do have a negative official cash rate somewhere, sometime in the future.”

“Where time passes”, “sometime in the future”……even as economic activity is collapsing around them now, and deflationary risks are rising. It is just an extraordinary approach, still not supported by any serious analysis, just this line about “keeping their word” to the banks.   Who are the stakeholders here?  Surely, the public –  the wider economy –  of New Zealand, with a statutory mandate about keeping inflation up near target and leaning against losses of output/employment?  Again, though, the questioning seemed pretty tame, but since the Bank only tends to grant interviews when the questioning is likely to be tame, I guess the journalist did what he thought he had to do.

Then Ha reappeared.  I’m going to take his latest two comments out of order.  This morning on RNZ I heard Ha talking up the success of the Bank’s asset-buying programmes, claiming that they had got lots of interest rates well down.    As noted above, no doubt that is true from the peaks, but it is to deliberately skate around the real issue.  Given the MPC’s refusal to cut the OCR further, very few interest rates have fallen far at all relative to where they were just a couple of months ago –  and nothing like what a slump of this magnitude would typically see.  All the big banks, for example, are offering well over 2 per cent for a six month term deposit, a more 20-30 basis points lower than they were offering in February.  In the midst of the biggest economic slump in history, real deposit rates are flat or rising.      That is simply a choice – an extraordinary one –  by the MPC, and one that their members never own up to or justify (and which, sadly, media never seem to challenge them on).

Ha’s other comments were in an interview yesterday with interest.co.nz.   There was quite a bit there I could unpick, including some comments –  similar to Hawkesby’s –  about the (strange to me) decision to buy local authority debt, perhaps even Housing New Zealand bonds (both of which sets of issuers are non-market entities) but not corporate bonds.    But I wanted to keep the focus on interest rates. From Ha we got this

While the RBNZ on March 16 cut the OCR by 75 basis points to 0.25%, and committed to keeping it there for at least 12 months, Ha said cutting it further is “probably something that comes back on the table at some point”.

He said the RBNZ had been mindful of giving banks some “breathing space” before going into negative interest rate territory.

Same complacency –  “at some point” (well after the worst is over?) –  same consideration for the banks, at the expense of the economy.   And still no serious rationale, no detail as to the nature of the issue, simply a bunch of officials –  ministerial appointees all –  who simply see no urgency about actually getting interest costs lower, even as though urge that more debt be taken on (as Ha did in his interview this morning, urging banks –  already facing higher risk and lower credit ratings –  to “step up”).

But in a way what really took the cake, and prompted this post, was the final bit of the report of the Ha interview

Pressed on why the RBNZ hasn’t released technical papers or more information explaining the rationale behind the unprecedented moves it’s making due to COVID-19, Ha said it was trying to be transparent.

He noted the speed at which things have been moving and how quickly data necessary for decision-making was becoming outdated.

He said the RBNZ was trying to be innovative, sourcing more real time data like credit card transactions, bank balance sheet data, information from the Inland Revenue and Ministry of Social Development and internet traffic.

Economists have been critical of the RBNZ, Treasury, Statistics New Zealand and government agencies more generally for not releasing more real time information ahead of regular releases.

I totally share the concern in the final paragraph (isn’t it extraordinary that we don’t yet routinely have weekly data on new unemployment benefit applicants, or a commitment from SNZ to publish indicative HLFS data monthly for the duration, and so on.  And it is good to hear that the Bank is looking at more real-time data but……..that claim that the Bank itself “was trying to be transparent” is simply belied, day in day out, by their actions and choices.  It is either an outright lie, or (more probably) just a typical manifestation of a longstanding approach: to them transparency means telling us what they think is good for us to know, and only that.

Of course, things are moving quickly. Of course data are quickly outdated.  Most probably some of the analysis presented to the MPC has been overtaken by events.  But that doesn’t justify the secretive approach the MPC continues to take, as they’ve embarked on huge monetary experiments (in this case,  for example, lets not cut the OCR despite the biggest most sudden economic slump in many half-centuries) or as they’ve lurched from one “model” to another with no explanation whatever.  It simply isn’t good enough.

I reckon their stance of policy is utterly indefensible, and have urged the Minister of Finance to use his long-established statutory powers to override the MPC’s choices (crisis times justify use of extreme, but well-established, statutory provisions).  Presumably the MPC members –  each of them, internal and external –  disagree.  Presumably they have a story to tell about:

  • why inflation expectations no longer seem to matter when they were a big concern a mere matter of months ago (exactly the same MPC members),
  • why doing something serious about negative rates was a realistic option on 10 March but by 16 March it had been absolutely ruled out for at least a year,
  • why real interest rates that are little or no lower than they two or three months ago remain appropriate in the face of the huge economic slump and deflationary shock,
  • why the MPC had done nothing to ensure banks were operationally ready for negative interest rates (retail or wholesale)

and so on.  But they’ve given us precisely nothing.

If Yuong Ha is remotely serious about his claim that the Bank/MPC is trying to be transparent, there is an easy remedy: simply release all the staff papers that have gone to the MPC this year to date (extraordinary times, extraordinary departures from usual practice).  It is, after all, official information, generated with taxpayers’ money for public policy purposes.

But of course they aren’t serious.  They were asleep at the wheel in getting prepared, complacent as the economic risks began to mount, and now seem out of their depth,  lurching from story line to story line, and oblivious or indifferent to the scale of the economic fallout and the way monetary policy should be responding.  Capping a rise in government bond yields is all very well and good, but it is a long way from actually fulfilling the mandate Parliament and the Minister of Finance have given them.

We deserve better, from the Bank/Governor/MPC, but also from those who have the power to do something about it: the chair of the Bank’s Board and, most notably, the Minister of Finance.  But seems the latter himself seems to have no vision or overarching framework for thinking about the economic dimensions of this crisis, and is ever loathe to go against conventional wisdom –  whatever it is at the particular hour – we can expect nothing from him.

(And, of course, talking of transparency, isn’t it remarkable that not a single Cabinet paper or substantive officials’ papers – whether or the health or economic dimensions –  has yet been released, even as one of the biggest crises for a century breaks over us, extraordinary powers are taken, rights shredded etc etc.  It was a government that once claimed it would be the most open and transparent ever. You have to wonder what the government and the Bank have to be afraid of. It isn’t that the enemy is listening –  it is a virus remember – but perhaps the fear is that we might see just how threadbare much of what has been done has been based on.  I suspect the Ombudsman is going to be kept busy for the next few years adjudicating on the determination of agencies and ministers –  including the Bank – to simply not be transparent at all.)