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.)