The Reserve Bank’s Monetary Policy Committee yesterday ambled back from their extended summer break and delivered the first monetary policy communication for the year – no speeches, no sign of any substantive interviews, but we did finally get this OCR review and Monetary Policy Statement. Having given themselves 3.5 months one might have hoped for something very good and insightful – there has, after all, been a lot happening, and the Bank has the largest concentration of macroeconomists anywhere in the country, generously funded at taxpayers’ expense.

I didn’t have that much trouble with the policy bottom line. If they were never going to cut the OCR and scrap the LSAP (as I suggested on Monday would have been warranted), at least they weren’t carried away with the “inflation risks mounting” sentiment that seems to be sweeping markets. In fact, I rather liked Orr’s response to a question in which he reminded listeners that central banks – the Reserve Bank more than most – had been too ready after the 2008/09 recession to want to raise interest rates and get back towards “normal” (a favoured line of his predecessor Graeme Wheeler), nicely and rightly adding that no one now knows what is “normal”, at least when it comes to interest rates. If medium-term forecasting is a mug’s game (on which more below), the Governor/MPC look to be right in suggesting that OCR increases are unlikely to be warranted any time soon.

On policy, there was an interesting framing in which the MPC said that they would keep policy “stimulatory” “until it is confident that consumer price inflation will be sustained at the 2 per cent per annum target midpoint, and that employment is at or above its maximum sustainable level. One might argue that that framing – especially that “and” – was (a) ultra vires (since the Remit subordinates the employment dimension) and/or (b) not entirely consistent (if employment is above maximum sustainable levels (as estimated) it is less likely that the Bank will be able to satisfy itself that inflation will remain “at” 2 per cent. Perhaps we should read it a little dovishly, but it remains a little disconcerting that after all these years of undershooting the target midpoint, the Bank is still giving nothing to ideas like the average inflation targeting the Federal Reserve has adopted for the time being. “At or above 2 per cent” might have been a preferable formula, and if that required a change in the Remit well…..as we discovered subsequently the Minister was already in that game. And it should remain a little troubling that with all the stimulus the Bank claims to be throwing at the situation, on their forecasts it is still 2.5 years until core inflation gets back to 2 per cent. Not much sign of the least-regrets framework really being acted upon, as distinct from cited.

In that context, one of the oddities about the Bank’s forecasts is that 2-3 years hence the Bank tells us it thinks there will be a positive output gap of 1.4 per cent (output running ahead of potential) and yet they also think the unemployment rate by then will be no lower than 4.6 per cent. On the face of it, that suggests they think the NAIRU-equivalent unemployment rate will by then be in excess of 5 per cent. Perhaps they do (perhaps those higher minimum wages really do cost jobs?), perhaps they don’t, but we don’t know because the Bank doesn’t explain.

Which is another of the oddities of the document. I’m not a big fan of medium-term macroeconomic forecasting, and was openly sceptical of its value for years when I was inside the Bank (it is too long ago to recall whether I was so sceptical when I ran the forecasting function) but the Bank purports to believe. A lot of effort has typically gone into doing and writing up the forecasts. And if you go to the formulaic pages at the front of the MPS, we are still told of a threefold approach to policy.

Which seems to put a lot of emphasis not on the conjuncture (current situation) but on the outlook (projections, forecasts surely?). And yet when we got to chapter 5 of the MPS – devoted to the outlook – there is much less than a full page of text, and then a two page bullet point table which contains no economic analysis at all, and which doesn’t appear to add anything beyond the numbers in the table. This appears to be a new approach – there was much more text in November – and it isn’t obviously an improvement. We have the Bank’s numbers, but almost nothing at all about the thinking, analysis, and research that lies behind them.

Perhaps – given my scepticism on medium-term forecasting – that might be more pardonable if there was lots of really high quality analysis of the current and recent past situation. In times like the present, perhaps one really can’t improve on a decent understanding of where we are now, and what we are learning from incoming data. But there isn’t anything very serious on that score either. For example, there is no sustained analysis of the housing market – which seems all the more extraordinary in light of the Minister’s intervention this morning – no sign that the Bank has done serious work on unpicking the various factors driving it, or influencing their quite optimistic forecasts. There is, for example, reliance on a story about returning New Zealanders last year. Perhaps it is a big part of the story, but argumentation is never developed, alternative hypotheses are never tested, and there is barely any mention of the rather large reduction in the number of non-citizens arriving (as it happens, it also isn’t that clear what they are assuming about net migrations as and when borders reopen).

Similarly I didn’t see any serious analysis of why the Bank thought it had been so surprised about recent developments. Of course, they weren’t alone in that surprise, but they set monetary policy, and they have all those resources at their disposal. Was it that monetary policy had been surprisingly potent – whether OCR or LSAP? Was it that resources and consumption were just much more flexible than they thought? Was it housing? (but if so, an authoritative analysis of the housing market is all the more important surely?) I don’t know the answers, and am not pushing particular stories, but shouldn’t we expect fresh and authoritative insights from the Bank? But there is nothing there – and nothing in the comments of the Governor and his senior staff at the press conference yesterday. There are lists, there are charts (some moderately interesting), but little or no insight or analysis – and there have been no speeches etc offering it either. It is the weakness of the institution – they might get some individual calls right, but one can’t have any confidence that they really know what they are doing and deserve deference for their insights, research and authoritative insights and judgements. Instead we get things like populist digs at banks for not, in the Governor’s view, having lowered their lending rates “enough’ – as if he was either a politician or perhaps a competition regulator. Oh, and in a document of not much more than 30 pages of text, devoid of much serious analysis on core issues, there is three pages devoted to one of the Governor’s pet playthings – the “Maori economy”. Can we expect one on the Catholic economy, the lefthanders’ economy, or the Labour-voters economy next? Each would be equally irrelevant to the Bank’s macroeconomic monetary policy – one economy, one instrument – statutory focus.

But the MPS was yesterday, and then this morning – safely after the FEC had had its chance to question the Bank – we had the real monetary policy initiative of the week, with the Minister of Finance announcing that he had changed the Remit to which the Bank works. He can do that, and had signalled back in November that he might make such a change. The new Remit is here.

It is a pretty shoddy affair on the Minister’s part. The new Remit was dated 22 February – Monday. Presumably the Bank was well aware of it. But the Minister kept it quiet until today, and the Governor made no mention of it yesterday – when the journalists had their quarterly chance to grill the Governor on monetary policy topics (next time not until late May). From a government that used to talk of being the most open and transparent ever, from a central bank that likes to claim it is highly transparent, it was like a sick joke, designed to avoid serious scrutiny and have all the reportage based on press releases – the Minister’s puff piece, and the Governor’s fluff.

It was typical Robertson (and perhaps Orr too). Robertson has never shown any sign of being serious about better monetary policy or a better institution (if he had, for example, he wouldn’t have banned people with an active research interest in monetary policy from being considered for the Committee) but he is very assiduous about having it look as if he is making a difference. That remains the best way to understand the first round of Reserve Bank reforms, and is the best way to see today’s announcement. The government is under pressure for doing little or nothing on housing. The Minister knows that monetary policy has little or nothing to do with the New Zealand housing market policy disaster, but he needs to look as if he is doing something, win a news cycle or two, and perhaps even fend off a few of his left-wing critics who do blame the Bank.

If you doubt that interpretation, look at the specific changes the Minister has made. At the front of the document there is woolly political paragraph about the government’s wider economic goals. It has no binding effect on anyone, but to that long list Robertson has added

An effective functioning housing market is a critical component of a sustainable and inclusive economy and promotes the maintenance of a sound and efficient financial system.

Well maybe, but even if you, I, the Governor or the MPC agreed it is simply a statement of faith, and anyway the Reserve Bank – especially with its monetary policy hat on – has no impact in delivering “an effective functioning housing market”.

And then later in the document the Minister has added some words. The first ones are in a section that does bind the Bank. There is a list of things that, in pursuing price stability and supporting maximum sustainable employment the Bank is required to do. There is longstanding stuff about avoiding “unnecessary instability in output, interest rates, and the exchange rate”, about looking through one-off price shocks, and having regard to “the efficiency and soundness of the financial system”. To that list the Minister has added this

assess the effect of its monetary policy decisions on the Government’s policy set out in subclause (3

and that “Government’s policy”? It reads thus

The Government’s policy is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.

How wet is that? So the MPC is only required to “assess” the impact of its decisions on the government policy, not act in pursuit of that “government policy” (which might well be ultra vires anyway). A Reserve Bank action will no impact on a government policy: government policy will still be what it will be. At most that is another paragraph in each MPS. And quite how monetary policy decisions will affect the mix between the despised “investors” and other potential buyers will be a mystery to almost everyone (the Bank has financial regulatory interventions that it can use – although borders on the ultra vires to do so – that might have an effect but…..this is monetary policy.

It was a feeble effort. On the one hand we should be glad that the Minister sees sense and doesn’t ask the Bank to pursue house prices – doing so would simply push unemployment higher than it needs to be – but much better if he’d simply done nothing on monetary policy – and he and his colleagues concentrated on the real issues – rather than this limp effort in performative display, stage-managed to minimise the risk of serious immediate scrutiny. The Governor was, I guess, much too diplomatic to point out the emptiness of today’s announcement, but how he’d have answered faced with a sceptical press conference would have been interesting. And how MPC colleagues might have answered if they were ever allowed to speak openly, if appointments had not simply been based on who met certain political and gender criteria, who wouldn’t ever make life awkward for the Governor.

(Oh, and if the Minister and Governor really weren’t trying to avoid scrutiny, the obvious thing would have been to have released the Reserve Bank advice, the Treasury advice, and any Cabinet paper when the new Remit was announced. Of course they didn’t.)

Having taken their long summer break – not heard from since 11 November – the Reserve Bank’s Monetary Policy Committee will be out with their Monetary Policy Statement on Wednesday. Much has changed in the economic data and indicators, here and abroad, since then, and it will be interesting to see what the Governor and has committee have made of it all. There are some genuine surprises and puzzles that the Committee should have been grappling with – and most other macro economists and commentators too, but the rest of us don’t get to set monetary policy. And if the strength of the economic rebound is a surprise – and it would appear to have been to the Bank too – how resilient is that rebound likely to prove, and under what conditions?

I’m somewhat sceptical of the idea of a resilient rebound this year – and with more than a few questions/puzzles about quite which data we can really count on at present – but without a compelling explanation for last year, one has to be even more hesitant than usual about backing a view about the future (macro forecasting is mostly a mug’s game anyway).

My own approach to monetary policy would probably be the one – “least regrets” – the Bank has repeatedly articulated over the last couple of years, if rarely followed in practice. That is especially so because the last year has made me more sceptical than I was about attempting to use fiscal policy for macro stabilisation (as distinct, say, from income relief amid a lockdown). Interest rates are the prices that balance savings and investment intentions, and monetary policy is about allowing interest rates to do that job.

And so even if the level of economic activity – even in per capita terms – is now back to something like it was at the start of last year, we still have

• a central bank that has done nothing to reduce the (true) effective floor on the nominal OCR (even if they have very belatedly ensured that banks can cope with modestly negative rate),
• core inflation that is still (a little) below the midpoint of the target range, not having been at or above that midpoint for the best part of a decade),
• inflation expectations (surveys and market prices) that are still typically below the target midpoint, often by quite a long way (and this is so even though there has been quite a –  welcome –  lift in recent months),
• the unemployment rate (inevitably measured less precisely than usual) is still non-trivially above reasonable guesses at where a NAIRU might be,
• most other countries’ economies are doing less well cyclically than New Zealand’s and if vaccination programmes are well underway in a few of them, anything like normality still seems quite a way away, 
• there is a great deal of uncertainty (inescapable, unavoidable) about the environment in which firms and households will be operating, and uncertainty tends not to encourage either consumption or investment spending, and
• if the US is having another fiscal splurge, more generally across advanced countries the pressure in the next year or two is likely to be towards fiscal consolidation –  not necessarily dramatically so, but certainly in contrast to last year.  There isn’t much sign New Zealand will be any exception to that (nor, in my view, should it).

And then there is the wider backdrop. Even if we recover from this unusual Covid recession more readily than many had expected, the issue that has increasingly dogged monetary policy over the last decade has not gone away: nominal policy interest rates in more and more countries (now including former high interest rate countries New Zealand and Australia) are now near zero leaving rather limited monetary policy capacity when the next serious recession – grounded in economic developments not infection ones – comes along. That might be 10 years away, but it might be only a handful. The best thing monetary policy can do to help ensure there is some policy leeway next time is to err strongly on the easing side at present, generating inflation (and inflation expectation) outcomes that are – for a change – in the upper part of the target range. The Bank could articulate something like the Fed’s average inflation targeting approach – or, since the Minister is the one supposed to set the target, the Minister could tell them to – but a decent start would be to start acting as if they would be totally comfortable if, by chance, core inflation averaged say 2.3-2.5 per cent over the next five years. That doesn’t require actively targeting such numbers, but it does require recognising that central banks (including our own) have consistently over-forecast inflation over the last decade, and still don’t adequately understand why they’ve made that mistake. So by being actively willing to embrace higher inflation outcomes, perhaps the Bank and the MPC might just give themselves a better chance of delivering outcomes around 2 per cent – what successive ministers of finance have asked them to do.

If it were me, then, I would still be cutting the OCR, perhaps to zero this time. It would add a bit more macroeconomic stimulus, and would also be more realistic – since we don’t know the future – than idle pledges to keep the OCR where it is for some arbitrary length of time (recall that their last, hawkish as it turned out, arbitrary commitment only expires next month). And I would continue to express a willingness to take the OCR negative – and not a grudging willingness, but a genuine “do what it takes” approach to getting the economy back to full employment and inflation back to target.

And what of the Large Asset Purchase programme? If it were me, I would discontinue it now. That isn’t inconsistent with my macro stance (see above) because as regular readers know I’ve long been of the view that the LSAP was not making much macro difference at all (even if it may, at the margin, have helped a little in stabilising bond markets in the couple of weeks of global flurry last March), while it continues to (a) act as distraction (enabling the Bank to look and sound as if it is doing more than it is, and (b) has led some people to believe that somehow monetary policy, notably the LSAP programme, is greatly exacerbating that unnatural disaster of the rigged New Zealand housing market. Scrap the LSAP and nothing of substance will change around the housing market – access to finance, access to (use) land, supply of finance, demand, or even the shorter-term interest rates that are relevant to most mortgage borrowers. (And, of course, more generally the unnatural disaster has almost nothing to do with monetary policy – and even for those who want to “blame” interest rates, bear in mind that very long-term market rates, that central banks have little direct hold over most of the time, have been falling for decades.)

Now I don’t for a moment suppose that the Bank will do anything of that sort, on any of what I’m suggesting about monetary policy. But I hope they do give us some sort of serious framework outlining the sorts of specific factors that might eventually lead them to discontinue the LSAP. It is, for example, hard to see how they could justify continuing it if (a) they now believe banks can adequately cope with negative interest rates, and (b) if they get to a point where they think the risks are no longer skewed to the downside.

On such things, I’ve been reading over the last week a new book by the British economist Jonathan Ashworth on the experience this century with central bank asset purchase programmes (it is 20 years next months since the Bank of Japan first launched its quantitative easing). Quantitative Easing: The Great Central Bank Experiment was published last year and clearly was completed on the very eve of Covid – a couple of 2020 references, but no mention of the Covid recessions/interventions at all. It is a really nice summary treatment and documentary record of the activities in this area of the Fed, the Bank of England, the ECB, and the Bank of Japan, up to and including the Fed’s partial withdrawal from QE, as it finally raised interest rates after 2015 and wound back the size of its balance sheet. Although the publisher – launching this new series of books on aspects of the global financial system – describes the approach of the series as “resolutely heterodox”, in fact the book is strikingly orthodox. It is, therefore, quite a nice summary of the likely way the Reserve Bank and The Treasury were seeing the possibilities, and limitations, of quantitative easing when they were advising the government at the start of last year. It is also a good single point of reference if, like me, memories of some of these programmes grow somewhat hazy over time. And for anyone wanting a good introduction it is a fairly accessible read.

The orthodox view tends to be that asset purchase programmes have had some, perhaps significant, macroeconomic benefits. The case is probably strongest in the midst of the 2008/09 crisis when both the UK and US launched such programmes (although with important differences between those programmes) although Ashworth seems to favour interpretations in which later programmes have also had useful effects. I’m more sceptical, for a variety of reasons. Much of the work in this area rests of event studies around the announcement of programmes, and so it is a shame that Ashworth does not engage with (for example) the published work of former senior St Louis Fed researcher Dan Thornton who has critically reviewed claims in that are (see, for example, this journal article, and this policy piece). Ashworth rightly highlights how wrong were the people who claimed a decade ago that the asset purchase programmes would lead to a huge upsurge of inflation (much the same claims are made in some quarters on the right about the latest asset purchase programmes) but doesn’t really probe deeply questions as to whether a large scale asset swap can really make very much sustained macro difference. He doesn’t, for example, engage with the idea that things might be different if a central bank was buying bonds yielding, say, 10 per cent, and paying zero interest on settlement cash balances (as would once have been the norm) than if the central bank is purchasing assets yielding under 1 per cent (sometimes under zero) and paying the full policy rate on the resulting settlement cash balances. And although he usefully looks at the Fed’s balance sheet wind-down pre-Covid, his conclusion that that policy choice had little or no macro impact doesn’t seem to lead him to reflect afresh on whether the earlier policy interventions really had as much sustained effect as many central bankers prefer to believe. (One of my own sceptical arguments over they ears has been that there was little sign that bond yields had fallen further relative to policy rates in countries that used the LSAP tool – say the US or UK – than they had in countries that did not – say New Zealand or Australia.)

One point Ashworth does usefully highlight – and which I hope the RB will touch on on Wednesday – is the stock vs flow distinction. If QE has an effect, it is from the transactions in the market at the time (the flow) or from the accumulated withdrawal of bonds from the market (a stock effect). He notes that the literature tends to favour the stock story. If that is correct – and if QE has much effect at all – then, for example, the Reserve Bank could discontinue the LSAP now and continue to assert that the stock of bonds they had purchased was continuing to have a material stimulatory effect.

And just in case you think that LSAP-scepticism might just be some Reddell idiosyncrasy, I can leave you with a couple of quotes, The first is from the body of the book, from Paul Krugman, quoted in 2015 observing of the unconventional monetary policy tools “the bad stuff [presumably inflation risks] unpersuasive, the good stuff maybe, but not really compelling, this has just not turned out to be the game changing policy too that people had expected”. The other quote is from the Foreword to the book by the eminent academic and former central banker, Charles Goodhart (also a former colleague of Ashworth’s). Goodhart clearly likes the book, and commends it to readers, but notes that his own view that beyond intense crisis periods – in which bond purchases can respond to liquidity and market dysfunction stresses – the direct effect on the real economy via interest rates [ and recall that Orr claims the LSAP works by affecting interest rates], either actual or expected, and on the portfolio balance, was of second-order importance. QE2, QE3 and QE Infinity are relatively toothless”.

As I’ve noted previously when you have a tool that largely involves swapping one lots of (longer-term) government liabilities for another lot of (shorter-term) government liabilities – both paying low but market interest rates – and when your swap doesn’t even displace many existing holders of the long-term assets, it is inherently unlikely that you could use such a tool to generate large or sustained macro effects. My best read of the experience to date – abroad, nicely described in the book, or at home – is that we’ve seen just what we should expect, but with lots of central bank handwaving (the need to be seen to be doing something) that has distracted people into thinking that the tool is much more powerful – for good or ill – than it actually is.