“Frankly simply daft”

I wasn’t going to write anything here today, but I couldn’t let the final question and answer from this morning’s Finance and Expenditure Committee hearing on the Monetary Policy Statement go without record and comment.

Simon Bridges, National’s FInance spokesman, asked the Governor whether the current prohibition – agreed between the Governor, the Board and the Minister – on any (external) MPC member having any active, engaged (present or future) analytical/research interest in monetary policy was not “frankly simply daft”, and did it not “ruin the ability to have thought diversity”.

He might well have added, but time was short, “and without precedent anywhere else in the advanced world” (or quite probably in most of the less-advanced world). Ben Bernanke would be disqualified, Lars Svensson would be out, and one could run a very long list of the sort of people who’ve served with distinction on the MPCs of other countries, whom Orr, Quigley and Robertson bar as a matter of determined policy.

Labour chairman Duncan Webb attempted, somewhat half-heartedly, to stop the question being asked, suggesting that it wasn’t really relevant to this Monetary Policy Statement (as if that was not also the case with several other questions, notably those from government MPs).

But in the end, the Governor did answer. He claimed first it was a matter of “legislation and government”. What he might have meant was not clear, but here is what the legislation says. The Minister makes the appointments, but can only appoint people the Board recommends, and the Board has to consult the Governor on those recommendations. These types of people are (rightly) disqualified.

People with a strong ongoing, and possible future, analytical/research interest in macroeconomics or monetary policy are not. That ban – the blackball – is pure Orr/Quigley/Robertson in concert. And none of them has ever mounted a substantive defence of this extraordinary ban, a ban without precedent.

But then Orr went on to end with a claim that the Monetary Policy Committee has a “very high level of expertise in monetary policy”.

It is worth distinguishing here between the external (non-executive) members – to whom the formal ban applies – and the executive (and majority) members.

There are three non-executive members:

  • Professor Caroline Saunders, who knows quite a bit about international trade but even her RB bio does not suggest knows anything in particular about monetary policy,
  • Peter Harris, former adviser in Michael Cullen’s office and former chief economist at the CTU. His RB bio also lays no claim to any particular background or expertise in monetary policy, and
  • Professor Bob Buckle. Buckle is a retired academic, who also worked in The Treasury for several years. He has something of a background in macroeconomic matters, but his focus tended to be more on tax and fiscal issues. Buckle is not self-evidently unsuited for the role – although he has long tended to be a “don’t rock the boat” establishment figure – but has no particular track record on monetary policy, let alone “high level expertise”. And he has, presumably, signed on to the understanding that he will never again do any writing or research on matters associated with monetary policy or macroeconomics (that is part of the ban).

Hardly a “very high level of expertise”.

Then, of course, there are the executive members, to whom the formal ban does not apply:

I’m not going to dispute that either the Governor or the Deputy Governor has some relevant qualifications and experience (although the deputy governor’s day job is now financial regulation and supervision), but neither is what most people would call a high-level expert. That needn’t be a criticism – the central bank is more than monetary policy – but you might hope for high level expertise (even “a very high level of expertise”) somewhere on the MPC. As it happens, neither Orr nor Hawkesby has even given a serious and thoughtful speech on monetary policy in their time on the MPC.

There was, for yesterday’s decision, the outgoing chief economist Yuong Ha. But he is leaving, with no other job to go to, and in his three years on the MPC gave not a single speech, delivered not a single paper, on matters monetary or economic.

The new appointee is Karen Silk. She has been a general manager at Westpac for some years, and will have senior management responsibility for financial markets where, just possibly, her skills might be a match. But her qualifications are in marketing and accounting, and she has no work experience relevant to being a monetary policymaker, or the senior executive responsible for those functions. Hard to imagine that morale among the Bank’s remaining economists did not dip quite a bit further when her appointment was announced. It is as if they wanted to go above and beyond and apply the ban to executives too,

It is now more than three months since it was announced that Yuong Ha was leaving, and the Bank has still not been able to fill the role – a job that would once have been one of the best jobs in New Zealand for a macroeconomist with policy interests. Perhaps they will appoint the person who will be filling the vacancy on an acting basis, but we don’t know.

There are some competent people on the MPC, and as I’ve written previously I don’t believe all 7 need to be (or even should be) research economists, but there is really no one there now who – by any reasonable global standards – could be described as offering a “very high level of expertise in monetary policy”.

That isn’t good enough – and the problems are especially evident with recent macro and inflation developments – but it is a choice, by Orr, Quigley and (above all) Robertson. So I hope MPs and journalists keep asking about what possible justification there can be for this extraordinary ban on some of the potentially most talented people who might otherwise be appointed to the Committee.

The Monetary Policy Statement

If anything I came away from today’s Monetary Policy Statement and (the bulk of it that I saw) the Governor’s press conference more convinced that I was yesterday that the OCR should have been raised by 50 basis points today.

There were a couple of elements in the minutes that were a little more encouraging than one might have feared.

There was the fact that a 50 point increase was clearly seriously considered, and debated. There was the fact that that debate was actually disclosed in the minutes (I think that is a first). There was the explicit comment not ruling out 50 point increases in the future. And there was, at last, a slow start to the process of unwinding the huge punt on the future of bond rates taken on in the LSAP intervention of 2020 and 2021.

It could have been worse. There clearly is an element of unease around the Committee table around the rise in inflation expectations, even for the longer-term horizons the Bank has often previously used to reassure itself there was no particular problem.

But…..when 2 year ahead inflation expectations of relatively more-informed observers have increased (as they have) by 29 basis points since you last met, an increase of the OCR by 25 basis points – especially as those survey respondents will already have expected such an increase and factored it into their inflation expectations – isn’t getting on top of things, even slightly, rather it is just falling a bit further behind. Whether thinking about inflation or inflation expectations, the MPC has fallen short of the Taylor principle – that at very least one should raise (lower) the OCR to the extent inflation and/or expectations rise (fall). The real OCR is now lower than it was when they descended from the mountain top in November, even as all measures of inflation (including the core inflation ones) have moved considerably higher. In the Bank’s own words, all the core measures are now above the top of the target range.

And, of course, the real OCR is now materially lower than it was two years ago, even though (core) inflation has been high and rising and – again on the Bank’s own reckoning – the labour market is unsustainably tight, the unemployment rate is too low to be sustained.

And yet the Committee made no attempt anywhere in the document to justify why real monetary conditions now would prudently, on the balance of probabilities (and they even invoked the “least regrets” language again), be so much looser than they were two years ago.

Linked to that, and perhaps my major criticism of the document itself, is that there was no sustained effort to analyse and explain why the Bank’s core inflation forecasts had been so wrong, why core inflation was now above the top of the target range, or what the MPC had learned from that experience that now gave them greater confidence that they understood the inflation process sufficiently well to keep on with the “slowly does it” approach to adjusting the OCR. In the circumstances it is a pretty inexcusable oversight – and it was a bit disappointing that no journalists asked about the issue/omission.

If one goes back to those minutes, the MPC lists a few reasons not to raise the OCR by 50 points:

  • there were the LSAP sales, but that is a clearly just there to bulk out the paragraph, since the body of the document says any impact of the LSAP, including sales, is now very small, and the Governor reiterated that point even more strongly in the press conference. In any case, the bond sales don’t even start for several more months.
  • there was the fact that interest rates had increased quite a bit late last year.  Which is fine, but there isn’t any sign that (say) inflation expectations have dipped.
  • there was Omicron, which seems to have been a factor, even though monetary policy operates with lags that run well beyond the next 3-6 weeks of the peak Omicron wave, and
  • there was this strange line: “They also noted that conditional on the outlook, the OCR is expected to peak at a higher level than assumed at the November Statement.”.   They have certainly raised the peak of the tightening cycle quite a bit, but……that would normally be an argument for getting on it with now, not just carrying on in the slow and measured way, even though you think –  as the MPC appears to –  that another 240 basis points of increases will be required.

There are more than a few puzzles in the document. For example, the peak of the OCR cycle (3.4 per cent) seems to be well above the Bank’s estimate of neutral rates – chart suggests something around 2 per cent – and both core and headline inflation eventually come down a lot. But the economic forecasts suggest this all happens by “magic”, since the output gap only goes negative in the year to June 2025, and the unemployment rate looks as though it never gets above the NAIRU. It reinforces the point that the model – the understanding of the inflation process and what has gone on in the last couple of years – is at best weak, and possibly missing in action.

At this point I should make clear that I do not have a strong view on where the OCR cycle should peak. I tend to think it is a fool’s errand given how little we know, and so I concentrate on the next few quarters. But the Bank is clearly uneasy about inflation expectations, thinks there is a lot more to do, and yet seems to want to get there very slowly, running in the process risks of things getting even further away on them. 50 basis points would have prudent, especially at a time when no one supposes there is much risk that a few months down the track there would have been cause for regret, having raised the OCR to the fearsome level of (about) -2 per cent.

Is there reason to think economic activity may not do that well this year? Indeed there is, although the eventual opening of the borders will add to (not detract from) capacity (including labour market capacity) and inflation pressures), and core inflation having once got this high – and the Bank expects it to stay this high for at least the next year – doesn’t typically come down by magic. It typically requires some policy force – a little more than is implied by real monetary conditions a lot easier than they were before Covid and this inflation surge got underway. As it is, the Bank is probably painting a rose-tinted picture all round: core inflation falls surprisingly easily, and productivity growth actually picks up a bit. Perhaps it will happen, but there is no compelling case made (and the Bank’s answers to the productivity question were particularly half-hearted.

I could go on on other matters but will end just noting three points briefly:

  • since yesterday’s post, Bob Buckle and Peter Harris have been reappointed to MPC positions for further three year terms.  There was no question to the Governor about how he can possibly justify –  the more so in the current circumstances –  the blackball placed on anyone with a serious ongoing engaged analytical or research interest in monetary policy.    The final appointment is made by the Minister of Finance, but he can appoint only those nominated by the Bank’s Board and no doubts that Orr dominates the Board on such matters, 
  • there was no attempt by the Bank to justify or explain away the more-than $5 billion in losses run up on the LSAP and –  more disappointingly –  no questions from the assembled media,
  • there was not a single question about the appointment to the senior deputy position responsible for macroeconomics and monetary policy (and to the MPC) of someone so manifestly underqualified –  with no relevant qualifications or experience – as Karen Silk.

Perhaps the FEC members might do a little better when the Governor next appears there?

UPDATE: I had to go and pick up a child and so missed the last few minutes of the press conference. I gather the Governor explained that the strange cover was in honour of his departing chief economist, who told us last time he was going to coach his son’s cricket team. It is a nice touch…….for someone who appears to have been forced out in the great Orr restructuring.

What the MPC should do

The Reserve Bank and the MPC will tomorrow emerge from their long summer slumber to deliver a Monetary Policy Statement and OCR decision. It is quite extraordinary that in this period, of considerable volatility, uncertainty, and inflation surging above the target range (even on core measures) we’ve heard precisely nothing from any of them (individually or collectively), and had no policy actions, for three months.

But, at last, tomorrow we will hear. As I’ve said repeatedly here over the years, I’m not really in the business of trying to guess what the MPC will do. There are plenty of people with a strong interest in that, and banks have people who nurture every little contact or conversation they can secure with Reserve Bank officials, analysts, or policymakers. As the Bank says little in public, and isn’t that consistent through time in how it acts, all one can say is good luck to those people.

My interest is in what the Reserve Bank should do, given the target set for them by the government (and, of course, the wider but less immediate question of what that target should be). The target is really pretty specific, with a primary focus on keeping the persistent elements of inflation near 2 per cent.

Against the backdrop of the Remit, I think it is pretty clear what the MPC should be doing tomorrow:

  • they should be raising the OCR by 50 basis points, and giving a signal that, all else equal, they expect another 50 basis point increase at the next review on 13 April,
  • they should be terminating new loans under the Funding for Lending programme, the crisis programme introduced in 2020 which is still at the margin having the effect of holding interest rates lower than otherwise, and
  • they should commence a programme of bond sales, designed to liquidate the LSAP bond position within 2 years (or, equivalently, have agreed a programme with The Treasury under which it would sell new bonds on market, buying back on the same day an equivalent amount of the bonds held by the Bank).

I don’t suppose either of the last two items on that list are at all likely.  I don’t even think that LSAP sales would make much material difference to monetary conditions (exactly paralleling my argument when they were buying bonds) but (a) every little helps, and (b) we should get this massive taxpayer bet on the bond market closed out ASAP, on principle.   And there is no crisis now –  the OCR is fully able to be used as desired.  Much the same goes for the FLP programme.  Closing that now might have some modest useful impact in tightening overall monetary conditions, but it would also align messages –  this isn’t the 2020 Covid crisis any more, and the focus of monetary policy now is (or should be) getting core inflation back down fairly expeditiously.

But even if they took both of those steps, the case for a 50 basis point increase tomorrow is strong. 

There are a couple of ways I find useful to look at things.

It was in last August’s MPS that the Bank really set out towards some significant OCR increases.  They didn’t act that day because they had the misfortune of a (long-scheduled) release a few hours after the Level 4 lockdown was imposed.  Back then they envisaged the OCR being 0.9 per cent for the March quarter 2022 (roughly consistent with having been 0.75 per cent moving to 1 per cent now).  But back then:

  • they thought core inflation was about 2.2 per cent and would go little or no higher (headine inflation forecasts for the second half of this year and beyond were 2.2 per cent, dropping further away)
  • they expected the unemployment rate for this quarter to be 3.9 per cent, and to go no lower than that.  
  • their latest reads on inflation expectations weren’t particularly inconsistent with inflation near the midpoint of the inflation target range (the most recent 2 year ahead measure they had then was 2.3 per cent).

And where are we now? 

  • the unemployment rate – still probably the best indicator of spare capacity (or lack of it) – had fallen to 3.2 per cent in the December quarter, and there is talk it could go lower yet.  No one seems to suppose that the unemployment rate is near the NAIRU.
  • the latest headline inflation rate is 5.9 per cent, and may go higher this quarter.  Much more importantly, core measures have increased substantially –  the best of them, the sectoral core factor model measure, is now 3.2 per cent for the year to December, and
  • while there is a wide range of inflation expectations measures, none of them are as low as the Bank was seeing back in August, and the best of them are pretty consistent with people assuming (and acting as if?) inflation will stay outside the target range (and well away from the midpoint) for the next couple of year.  Even with the tightening in monetary conditions observed in recent months.

It was really captured quite well in a newspaper article yesterday that reported that all economists talked to thought that the Bank was now “behind the game”.   In that sort of environment, when you’ve been repeatedly surprised by the strength of inflation, and outcomes are no longer consistent with target –  suggesting that your model of what is going on is not working that well – the appropriate response is not to edge up the OCR ever so gradually and hope.   Least regrets –  of which we heard quite a lot from the Bank over the last 18 months – calls for something a bit bolder, to get ahead of the rise in (core) inflation and assure watchers (firms, households, markets) that you really are serious, rather than reluctant.

Is there a case in Omicron for holding back (25bps rather than 50bps)?   I don’t think so.  We can see how other countries have come through the short and intense Omicron waves –  which will temporarily disrupt both supply and demand –  and there is little sign of what is required from monetary policy being revised down in the wake.

(“Not surprising the market” isn’t a good excuse either.  When you say nothing for months, the market has little to go on re the MPC reaction function.  If you won’t talk, you have to live with surprises sometimes.  The market will cope, although might suggest that a bit more communication than once every few months would make sense.)

The second way of looking at things is to compare where are now to where we were two years ago.  Having cut the OCR during 2019 by early 2020 markets, not discouraged by the Bank, were beginning to think in terms of when a first OCR increase might be warranted (still then, it was thought) some time away.

The OCR is early 2020 was 1 per cent.  Core inflation was probably just under 2 per cent (having edged up over the previous couple of years towards the target midpoint), and the unemployment was about 4 per cent.   Where things are now we’ve already covered above –  much more inflation, more capacity pressure, and on any metric you like materially higher inflation expectations.

Any policy and/or monetary conditions?

Well, the OCR today is 0.75 per cent, still below where it was two years ago.  A 25 point increase tomorrow will only take it back, in nominal terms, to where things were in February 2020.  The nominal exchange rate is also now about where it was two years ago.

But what about the interest rates that firms and households face?   We’ve heard a lot about fixed rate mortgage rates have risen from their lows.  And that’s true: a two year mortgage rate is now about 170 basis points higher than the low (last April).

But what of comparisons to the start of 2020?

So nominal mortgage rates are perhaps 50 basis points higher than they were two years ago. But inflation is a lot higher than it was then, and so are all indications of inflation expectations. For these purposes, I’ll just use the Reserve Bank’s own survey of two-year ahead inflation expectations: 1.93 per cent in the survey done at the end of January 2020, and 3.27 per cent in the survey done a few weeks ago, an increase of 1.34 percentage points.

Here is the same chart, but expressed in real terms, adjusted for the increase in inflation expectations.

and the same chart for term deposit rates

(Real) monetary conditions have tightened a bit from the lows, but they really needed to. Compared to conditions prevailing two years ago, real mortgage rate, real deposit rates and of course the real OCR are substantially looser than they were. And whereas two years ago inflation looked to be fairly comfortably somewhere near the target midpoint, nothing remotely that optimistic describes the situation now.

Of course there are other influences – things like fiscal policy, the terms of trade, other regulatory restrictions (eg tax or the CCCFA) – but it would very very hard indeed to construct a story that suggested that real monetary conditions as we find them today (or might find them tomorrow) are likely to be consistent with the Bank delivering on its mandate, on the environment as we see it today. In fact, if core inflation becomes established at current rates (3% plus), standard economic analysis would tell us that reductions in core inflation – to the 2% the Bank is supposed to be focused on delivering – are likely to come about only by luck (ill-luck probably – adverse economic events) or by monetary conditions being tightened to above-normal levels of tightness for some time, a process that would (at very least) result in a period of sub-par economic growth, perhaps even a recession.

We’ll see tomorrow what the MPC has decided to do. But whatever the rate adjustment we should be able to expect a serious and rigorous accounting for just what has gone wrong in the last 12-18 months, what the Committee has learned, and a serious analysis of the options and risks in the monetary policy that might be required to get core inflation (and expectations of it) settling back around 2 per cent. Sadly, with this MPC it would probably be a bit of a surprise if we got even the appropriate degree of analysis, self-scrutiny, and accountability.

Misleading?

Back in mid-December, the Reserve Bank fronted up to Parliament’s Finance and Expenditure Committee for the Annual Review hearing on the Bank. I wrote about it here. You may recall that this was the appearance where (a) the Bank (unsuccessfully) tried to kept secret before the hearing the loss of another couple of senior managers, and (b) seemed to mislead the Committee on just how many of their senior managers had gone or were going. In the wake of it, the Governor forced the early departure of his deputy Geoff Bascand a couple of weeks before he was due to leave anyway, over unauthorised contact with the media [CORRECTION: “shared information to a third party”] (most likely over those two new senior management departures).

But towards the end of the hearing (about 50 minutes in here) there was a brief exchange on matters climate change, with an unusually clear and unconditional answer from the Governor. Here was my December account

The study by the Federal Reserve Bank of New York is here, and a Wall St Journal write-up is here. Here is the abstract

Which seems plausible and not very surprising. But it is just one working paper, on one aspect, and I’m not here to praise or critique the paper. My interest is in the Reserve Bank, and Orr’s response. “Yes”, he said, they certainly had done modelling of their own.

This is the Bank’s own climate change page. Even now, two months on, the only thing they are showing under Research Papers is this (their own words) preliminary analysis of some of the issues, dated July 2018 a few months after Orr had taken office. This was from the summary of that paper

So, I lodged an OIA request that day asking for copies of the modelling the Governor has been referring to, and of any write-ups of it. One might have supposed they would be keen to air it, but it still took them until 10 February to respond. They say they intend to put it on their website eventually, but it still isn’t on either the climate change or OIA responses page. So the full document is here

Climate change modelling OIA response from RBNZ Feb 2022

The first part of the response is a long (three page) letter, obviously attempting to provide some framing for what does (and particularly does not) follow.  Their Senior Adviser, Government and Industry Relations assures me that 

The RBNZ’s view is that there are significant climate-related risks for the New Zealand economy and financial system. This means that we consider that sectors of New Zealand’s economy will be at risk of being affected by physical risks, such as drought, flooding and sea level rise, and transition risks, such as international and national changes in policy/regulation, trade, investment and consumer preference. We consider that it is inevitable that policies and conditions will change in response to this global challenge, and that New Zealand’s economy will be affected and changed by these global and national changes. New Zealand banks and their international counterparts have set up teams to monitor and understand these risks and to respond as necessary.

While we are certain that there will be changes in the economy and financial system resulting from climate change and actions to mitigate climate change, the degree to which risks apply to financial stability will depend on a number of factors including how risks are understood and managed. New Zealand banks and their international counterparts have set up teams to monitor and understand these risks and to respond as necessary. 

At which point, I’m drumming my fingers and going “yes, so you say, but my question was about the modelling the Governor assured Parliament had been done”.

There then followed a 15 page memorandum, dated 13 October 2021, to one of the Bank’s internal committees on “Prioritisation of climate-related risks for financial stability analysis”. It is mildly interesting

So it seems that they intend to do some work, but haven’t done anything very serious yet. This is their own summary

and

The only thing the Bank itself seemed to have done was this

The rest of the OIA release consisted of 15 pages of a Powerpoint presentation (from July 2021) on that dairy scenario, reporting work undertaken jointly with MPI (the Ministry for Primary Industries). Much of the presentation is withheld, and we really learn nothing from it beyond what is in that extract just above. None of this appears to have been independently reviewed, none of it has been published, and the Bank’s own description (see quote above) is that there is “very little” New Zealand research on the (possible) threat to the financial system. All we have is a statement of the fairly blindingly obvious: a serious drought out of the blue (as 2013 was) combined with low dairy prices – an unusual combination given that earlier Bank research found that New Zealand droughts tended to boost global dairy prices, but not impossible – would result in some losses to banks’ dairy loan books. And? It sheds no light at all on risks to the New Zealand economy and financial system as a whole, and especially not from climate change – a multi-decade process.

To be clear, I don’t think the Reserve Bank should be spending lots of scarce taxpayers’ money (well, not scarce to them given how lavish their funding now is) on modelling climate change risks, at least not without a great deal more serious robust international analysis suggesting that there was a substantive issue/risk emerging. But it is the Reserve Bank that holds forth on the issue, asserting the existence of a threat….and, it appears, it has done almost no work itself, in a New Zealand context, to support its handwaving.

For anyone interested in reading further, I can recommend a couple of pieces by Ian Harrison – who would no doubt have been heavily involved in this sort of stuff were he still at the Bank. The first, from October 2021, is on Climate Change and Risks to Financial Stability more generally. The second, from January this year,

Did the Governor actively mislead Parliament with his answer in December?   At very best, it looks borderline.  As is clear, from the OIA release and the Bank’s own papers, what little semi-formal work has been done to date sheds very little light of anything of interest, despite repeated claims by the Bank and the Governor about alleged “significant” financial system risks. 

A deteriorating institution

I write a lot here about issues around the Reserve Bank. Some of those issues are quite obscure or abstract, and I know some readers find some of those posts/arguments a bit of a challenge to grasp.

But yesterday we had as straightforward an example as (I hope) we are ever likely to find.

Inflation is very much in focus at present. Measure of inflation expectations get more attention than usual. There is a variety of measures, both surveys (in New Zealand mostly conducted for the Reserve Bank and by ANZ) and market prices. The Reserve Bank has been surveying households for 27 years, with a fairly consistent (although expanded on a couple of occasions) range of questions. At the Bank there was always a degree of scepticism about the survey – household respondents always seemed (eg) to expect inflation to be quite a lot higher than it actually was – but it was one more piece in the jigsaw, and if one couldn’t put much weight on the absolute responses, changes over time did seem to line with what households might be supposed to be feeling/fearing.

Of the questions, probably the one least hard for households to answer seemed to be the fairly simple one

No numbers needed, just something directional. We have 27 years of data.

The latest results of the survey came out yesterday. The Bank puts out a little write-up and posts the data in a spreadsheet on their website. Yesterday, the write-up didn’t mention this question at all, but the spreadsheet suggested that a net 95.7% of respondents expected inflation to increase over the next 12 months. That seemed like it should be a little troubling, given how high the inflation rate already is.

Except that……it turned out that the Reserve Bank had changed the question, without telling anyone, without marking a series break or anything. The new question is

And that is a totally different question. The old question is about whether inflation will increase or decrease, while the new one is about whether there will be inflation or deflation. At almost any time in the 88 year history of the Bank it would not be newsworthy if 95.7 per cent of people expected there to be inflation. There almost always is.

It isn’t necessarily a silly question in its own right (on rare occasions there are deflation “scares”) but (a) it is a much less useful question most of the time than the question that had been asked and answered for 27 years, and (b) you can’t just present the answers to one questions as much the same thing as the answer to the other. Especially when not telling users of the data.

It was real amateur-hour stuff. Now, in fairness to the Bank, there is a detailed account of the changed questions on the website, but when there was no hint that question had changed there was no motive to go on a detective hunt to find it.

The Bank tells us they have had a 38 per cent increase in the number of senior management positions in the last year, with no increase in the things they are responsible for, and they can’t even get fairly basic things like this right. They’ve destroyed the single most useful question in the survey, and right at the time when every shred of information on attitudes to inflation should be precious. And then seemed barely even to be aware of what they’d done – presenting the answers to two quite different questions as if they were in fact very much the same.

There were a few people yesterday suggesting it was some nefarious plot to reduce access to awkward data at an difficult time. I don’t believe that for a moment – although for wider peace of mind I have lodged an OIA request to confirm (and to find out whether, for example, MPC members even knew of the change). This was a stuff-up pure and simple, which management and senior management (for which the Governor is accountable) should never have allowed to happen. High functioning organisations don’t make stuff-ups like this.

Which is a convenient lead in to an article published this morning.

About five weeks ago Stuff’s business editor asked if I’d like to write a column for them on the Reserve Bank under Adrian Orr. I did so (a few days later) and the final version appeared this morning. I only had 800 words, and there was a lot of ground one could have covered, so much of the story has to be very compressed (and quite a few problem areas left out altogether). You can read the final Stuff version here, or the text I originally wrote is below. Were I writing it now rather than a month ago, I would put more weight on the inflation story – core inflation now having blasted through the top of the target range – but I wanted to distinguish between forecasting mistakes (which are somewhat inevitable, and the best central banks will make them) and things that are much more directly within the control of the Governor, the Board, and the Minister of Finance.

Alarming Decline

By Michael Reddell

Over the four years Adrian Orr has been Reserve Bank Governor, this powerful institution, once highly-regarded internationally but already on the slide under his predecessor, has been spiralling downwards.  The failings have been increasingly evident over the last couple of years.  Here I can touch briefly on only a few of the growing number of concerns.

One can’t criticise the Reserve Bank too much for running monetary policy based on an outlook for inflation and the economy that, even if wrong, was shared by most other forecasters. Until late 2020 the general view of the economic consequences of the Covid disruptions had been quite bleak. Notably, inflation was widely expected to be very low for several years.  The Bank got that wrong, and so inflation (even the core measures) has been a lot higher than expected.  If they were going to err – after 10 years of inflation undershooting the target – it may have been the less-bad mistake to have made.  But they have been slow to reverse themselves – the OCR today is still lower than it was two years ago – and slower to explain.

The Bank is much more culpable for the straightforward lack of preparedness and robust planning.  Orr had been quite open, pre-Covid, that he wasn’t keen on big bond-buying programmes, and if necessary preferred to use negative interest rates.  But when Covid hit it turned out that the Reserve Bank had done nothing to ensure that commercial bank systems could cope with a negative OCR.  They couldn’t.  So instead, as if keen to be seen to be doing something, the Bank lurched into buying more than $50 billion of government bonds.  Buying assets at the top of the market is hugely risky and rarely makes much sense, but the Bank kept on buying well into 2021.  As interest rates rise, bond prices fall. The accumulated losses to the taxpayer are now around $5 billion ($1000 per person, simply gone).  And yet the Bank has never published its background analysis or risk assessment, it offers up no robust evidence that anything of any sustained value was accomplished, and the Governor refuses to even engage on the huge losses.

What of the new Monetary Policy Committee itself?  From the start the Governor and the Minister agreed that anyone with current expertise in monetary policy issues would be excluded from the Committee.  For the minority of outside appointments, a willingness to go along quietly seems to have been more important than expertise or independence of thought.  Meanwhile, staff (Orr and three others who owe their jobs to him) make up a majority of the Committee.  Minutes of the Committee are published but deliberately disclose little of substance, there is no individual accountability, and four of the seven MPC members have not given even a single published speech in the almost three years the Committee has been operating.  Speeches given by the senior managers rarely if ever reach the standard expected in most other advanced countries.  Meanwhile, the in-house research capability which should help underpin policy and communications has been gutted.

And then there is the constant churn of senior managers.  In some cases, people who were first promoted by Orr have since been restructured out by him.  In just the last few months, the departures have been announced – not one of them to another job – of four of the five most senior people in the Reserve Bank’s core policy areas: the Deputy Governor, the chief economist, and the two department heads responsible for financial regulation and bank supervision.   It isn’t a sign of an institution in fine good health. 

And all this has unfolded even as total staff numbers have blown out, supported by the bloated budget the government has given the Governor.   Orr often seems more interested in things he has no legal responsibility for than in the handful of (sometimes dull but) important things Parliament has specifically charged the Bank with.  Perhaps worse, he has a reputation for being thin-skinned: not interested in genuine diversity of views or at all tolerant of dissent, internally or externally.  One might just tolerate that in a commanding figure of proven intellectual depth, judgement, and operational excellence, but Orr has exemplified none of those qualities.

How to sum things up?  Lack of preparedness, lack of rigour and intellectual depth, lack of viewpoint diversity, lack of accountability, lack of transparency, lack of management depth, lack of open engagement, and lack of institutional memory.  It is quite a list.  The Governor is primarily responsible for this dismal record of a degraded institution but it is the Minister of Finance who is responsible for the Governor.

This really is a matter of ministerial responsibility.

Finally, earlier in the week I wrote a post here about expertise and the Monetary Policy Committee in which, among other things, I lamented again the absurd policy adopted three years ago by Adrian Orr, the Bank’s Board, and the Minister of Finance, excluding from consideration for (external) MPC positions anyone with any ongoing systematic interest in macroeconomics or monetary policy. This morning Jenee Tibshraeny of interest.co.nz had a new article focused on that restriction. She has comments from various economists, the only one sort of defending it one who was adviser in Robertson’s office at the time the restriction – one without parallel in any other advanced country central bank – was put on, but had also asked Robertson and the Bank (Orr or Quigley or both?) whether the same restriction would be applied to filling the upcoming vacancies.

It should be incredible, literally unbelievable, if we had not seen so much from Robertson and Orr over recent years careless of the reputation, capability or outcomes of the Bank. As it is, it is just depressingly awful. One hopes – probably idly – that the Opposition political parties might think it an issue worth addressing. After all, not only are qualified people with an ongoing analytical etc interest in monetary policy excluded from the external MPC positions, but the latest appointment to an internal position (by Orr, Quigley and his board, and Robertson in concert) suggests the bias against actual expertise and knowledge might now be being extended to encompass executive roles.

Expertise and the MPC

I’m yielding to no one in my low view of the Reserve Bank Monetary Policy Committee. I’ve been writing about the problems – structural and personal – since the new Potemkin-village model (designed to look shiny and new, but to change little) was set up three years ago, and it was (for example) one of my Official Information Act requests that got the written confirmation that the Minister, Governor and the Bank’s Board had formally agreed that no one with ongoing expertise in monetary policy or macroeconomics, or likely future interest in researching such matters, would be appointed (as an external member) to the new Monetary Policy Committee (three relevant posts here, here, and here). It was a simply extraordinary exclusion, which reflected very poorly on all involved, but which never seemed to get the scrutiny from media or MPs that it deserved. In no other modern central bank would such an approach be adopted.

But, for all that, I thought Eric Crampton’s op-ed in the Herald today overbalanced in the opposite direction. The column is behind a paywall, so I’m not going to quote extensively, but the gist seemed to be that you need a PhD in macroeconomics AND to be actively engaged in ongoing research to serve on the MPC. Crampton and an Otago university academic then report the results of a little survey they’d run of New Zealand academic macroeconomists to find out who those people thought should be appointed to the MPC, when the terms of two of the current externals expire shortly. It wasn’t noted that the most favoured candidate – one of the incumbents, Bob Buckle – does not have a PhD in macroeconomics, and has presumably taken a self-denying ordinance not to do any relevant research or analysis now or in the future (or otherwise he’d fall foul of the exclusionary rule, see above).

I don’t want to run commentary on all the individuals reported on. One or two might well be excellent additions, one or two would probably be dreadful, but none should be disqualified in advance simply because they might keep thinking about the issues, or writing about them in future. Even if the pickings are fairly slim, that far I agree (strongly) with Crampton. Of course, at present none of it probably matters much as management enjoys a permanent majority on the MPC, and the Orr/Robertson approach has been to prevent external members from speaking in public or even having their views recorded in the minutes. Three years sightseeing aside, it is difficult to know why really able people would seek, or accept, appointment at present. Management appointees matter much more, and the most recent appointment – the new executive deputy in charge of macro and monetary policy, with not a shred of relevant experience – suggests things are heading in the wrong direction there too.

But I think the “cult of the PhD” can be carried too far, at least when it comes to policy roles (as distinct from, say, staffing the Economics Departments of our universities). Don Brash had one, but had been primarily a banker and intellectually curious as he was (and is) had no demonstrated ongoing interest or expertise in macroeconomic research. Alan Bollard had one. Graeme Wheeler didn’t. But little or nothing about how well or badly those individuals did their jobs – and reasonable people may debate each – came down to how complex an NBER paper they could each critique (let alone produce). I’ve noted several times over the years that of the Reserve Bank’s chief economists over my working life, about half had PhDs and half did not. But there was no obvious correlation between those who did (or didn’t) and effectiveness or intellectual energy. Some (one?) of the best did, some (two?) of the best didn’t, but one who did was almost surely the worst of them. In English-influenced countries even 30-40 years ago it wasn’t particularly common for even the most able people to pursue PhDs unless they wanted an academic career. A couple of the more published researchers at the Reserve Bank in the last decade or so either didn’t have a PhD, or got one only rather belatedly (having already published quite a bit).

Or we could look around the world. Alan Greenspan was an economist but didn’t have a PhD (Update: thanks to the reader who pointed out that he acquired one well into his policy career). Jay Powell was a lawyer and private equity executive. Glenn Stevens, the previous RBA Governor, seemed to do a pretty reasonable job, and had neither a PhD nor a research track record. I’m not a great Lagarde fan, but she’s a lawyer and politician. Andrew Bailey has a PhD – in history – but spent his career in banking-oriented roles at the Bank of England. On the other hand, Phil Lowe, Mark Carney, Ben Bernanke, and Stefan Ingves have economics PhDs, even if not always with much sign of ongoing research interest.

Which is by way of saying that despite my many criticisms of Adrian Orr, the fact that he doesn’t have a PhD doesn’t bother me in the slightest. And the fact that Caroline Saunders – another of the independents – has one, if in quite unrelated areas of economics, allays not in the slightest my concern about the weakness (and tokenism) of her appointment.

A parallel I sometimes draw with the MPC is with the Cabinet. As Crampton notes, the MPC makes decisions that are final. So, in many areas, does the Cabinet (and often individual ministers). Very rarely do we expect the Prime Minister or Cabinet ministers to be professional technical experts in any of the areas they are minister for, let alone with the whole ambit of policies for which Cabinet is responsible. It often isn’t even helpful to have had a health expert as Minister of Health, and I’m pretty sure that in all New Zealand’s history we’ve never had an economist as Minister of Finance (nor is it common in parliamentary systems elsewhere). That isn’t a problem. We expect there to be a distinction between professional and technically-expert advisers on the one hand, and decisionmakers on the other. When either group tries to do the job of the other, or the advisory expertise is lacking, things run into difficulty.

[UPDATE: Bill Rowling, Minister of Finance 1972-74, did have an economics degree.]

The parallel with the MPC isn’t exact. We want the Cabinet to be making intrinsically “political” calls, about preferences, priorities, values etc. But we also want them to be judicious people – not unduly swayed by the latest whizz-bang research paper or think-tank idea, or the latest data point. We want/need them to be thinking about communications, public acceptability and so on.

So I’m not suggesting an MPC made up of the first 10 names in the Wellington phone book, or a bunch of pleasant (or otherwise) political hacks. But there is a place for a balanced committee, served by a highly expert staff (research, analytical, policy, markets, operational – all quite different components of what a capable monetary policy function needs). It seems quite likely that some of those roles would these days naturally be filled by people with PhDs – key figures in the research functions, most often perhaps the Chief Economist – but technical research virtuosity (of the sort a highly productive PhD may still offer – many do, many don’t) is just one, important, part of the relevant set of skills. Even in that sort of area, a passion to make sense of what is going on, to interpret evidence and data carefully, to be open to new ideas and fresh perspectives, seem to me to be what we should be looking for. Qualifications aren’t irrelevant, but qualities matter at least as much. And in an MPC that is dominated by management (which also controls all the staff resources), the willingness to think independently and ask hard but realistic questions, to engage effectively with experiences in other times and other countries, are what are likely to add most value. Some functioning academic researchers may be able to do that well, and their particular talents and experience should add value to the Committee. But so, far example, might someone who’d spent decades at the interface of economics and financial markets, or even – and one wouldn’t want this type dominating the Committee – the sort of classic old-school corporate director who is not afraid to ask questions when things don’t make sense, and who may act as a really effective test for how well the expert arguments, analysis, and lines of reasoning may be received in wider public audiences (I can think of a couple of these types who were on the RB Board in years past). Temperament is often at least as important as virtuosity. And effective public communications – not always an academic (or bureaucratic) strength – is vital.

Of course, the bottom line at present is that almost every dimension of the Reserve Bank (and particularly its macro/monetary functions) is weak: little research, little transparency, weak senior management appointments, a Governor with the wrong temperament for the job, an MPC structured to be ineffective, and weak appointees to the MPC. The ban on people with ongoing research interests – almost laughably bad as it is – is more like a symptom of a weak institution…..and a Minister of Finance who seems just fine with all that. And not even, it seems, bothered when core inflation bursts out the top of the target range.

UPDATE: I’d been aware that several of the top figures at the Bank of England in recent decades, including Eddie George and Paul Tucker, had not had PhDs (the latter having gone on to write a very serious book about central bank governance etc), but when I wrote the post I’d been labouring under the impression that the most prominent and eminent such figure – Mervyn King – had had a PhD. A reader got in touch to point out that he hadn’t. I’ve disagreed with many of King’s views, including in posts here, but no one can doubt that he was (and is) a figure of considerable intellectual eminence and thoughtfulness, whose speeches (for example) read well and make one think. He would seem ideally suited for an MPC.

Forecasting and policy mistakes

Yesterday’s post was a bit discursive. Sometimes writing things down helps me sort out what I think, and sometimes that takes space.

Today, a few more numbers to support the story.

I’m going to focus on what the experts in the macroeconomic agencies (Treasury and Reserve Bank) were thinking in late 2020, and contrast that with the most recent published forecasts. The implicit model of inflation that underpins this is that even if the full effects of monetary policy probably take 6-8 quarters to appear in (core) inflation, a year’s lead time is plenty enough to have begun to make inroads.

Forecasts – and fiscal numbers – in mid 2020 were, inevitably all over the place. But by November 2020 (the Bank published its MPS in November, and the Treasury will have finalised the HYEFU numbers in November) things had settled down again, and the projections and forecasts were able to be made – amid considerable uncertainty – with a little more confidence. And the government was able to take a clearer view on fiscal policy. The Treasury economic forecasts in the 2020 HYEFU incorporated the future government fiscal policy intentions conveyed to them by the Minister of Finance. The Reserve Bank’s forecasts did not directly incorporate those updated fiscal numbers, but…..the Reserve Bank and The Treasury were working closely together, the Secretary to the Treasury was a non-voting member of the Monetary Policy Committee, and so on. And, as we shall see, the Bank’s key macroeconomic forecasts weren’t dramatically different from Treasury’s.

The National Party has focused a lot of its critique on government spending. Here are the core Crown expenses numbers from three successive HYEFUs.

expenses $bn

From the last pre-Covid projections there was a big increase in planned spending. But by HYEFU 2020 – 15 months ago – Treasury already knew about the bulk of that and included it in their macro forecasts. By HYEFU 2021 the average annual spending for the last three years had increased further. But so had the price level – and quite a bit of government spending is formally (and some informally) indexed.

Here are the same numbers expressed as a share of GDP.

expenses % of GDP

By HYEFU 2021 the government’s spending plans for those last three years averaged a smaller share of GDP than Treasury had thought they would be a year earlier. (The numbers bounce around from year to year with, mainly, the uncertain timing of lockdowns etc).

There are two sides to any fiscal outcomes – spending and revenue. The government has been raising tax rates consciously and by allowing fiscal drag to work, such that tax revenue as a share of GDP, even later in the forecasts, is higher than The Treasury thought in November 2020. And here are the fiscal balance comparisons.

obegal

Average fiscal deficits – a mix of structural and automatic stabiliser factors – are now expected to be smaller (all else equal, less pressure on demand) than was expected in late 2020.

Fiscal policy just hasn’t changed very much since late 2020, and the fiscal intentions of the government then were already in the macro forecasts. Had those macro forecasts suggested something nastily inflationary, perhaps the government could have chosen to rethink.

But they didn’t. Here are the inflation and unemployment forecasts from successive HYEFUs.

macro forecasts tsy

In late 2020, The Treasury told us (and ministers) that they expected to hang around the bottom end of the target range for the following three years, with unemployment lingering at what should have been uncomfortably high levels. If anything, on those numbers, more macroeconomic stimulus might reasonably have been thought warranted.

There were huge forecasting mistakes, even given a fiscal policy stance that didn’t change much and was well-flagged.

That was The Treasury. But the Reserve Bank and its MPC are charged with keeping inflation near 2 per cent, and doing what they can to keep unemployment as low as possible. For them, fiscal policy is largely something taken as given, but incorporated into the forecasts.

Their (November 2020_ unemployment rate forecasts were a bit less pessimistic than The Treasury’s, but still proved to be miles off. This is what they were picking.

RB U forecasts

And here were the Bank’s November 2020 inflation forecasts, alongside their most recent forecasts.

rb inflation forcs

Not only were their forecasts for the first couple of years even lower than The Treasury’s, but even two years ahead their core inflation view was barely above 1 per cent. (The Bank forecasts headline inflation rather than a core measure, but over a horizon as long as two years ahead neither the Bank nor anyone else has any useful information on the things that may eventually put a temporary wedge between core and headline.) All these forecasts included something very much akin to government fiscal policy as it now stands. Seeing those numbers, the government might also reasonably have thought that more macroeconomic stimulus was warranted.

As a reminder the best measure of core inflation – the bit that domestic macro policy should shape/drive – is currently at 3.2 per cent.

core infl and target

There were really huge macroeconomic forecasting mistakes made by both the Reserve Bank and The Treasury, and – so it is now clear – policy mistakes made by the Bank/MPC. You might think some of those mistakes are pardonable – highly unsettled and uncertain times, not dissimilar surprises in other countries etc – and I’m not here going to take a particular view.

But of all the things Treasury and the Bank had to allow for in their forecasts, fiscal policy – wise or not, partly wasteful or not – just wasn’t one of the big unknowns, and hasn’t changed markedly in the period after those (quite erroneous) late 2020 macro forecasts were being done.

I guess one can always argue that if fiscal policy had subsequently been tightened, inflation would have been a bit lower. But Parliament decided that inflation – keeping it to target – is the Reserve Bank’s job. The government bears ultimate responsibility for how the Bank operates in carrying out that mandate – the Minister has veto rights on all the key appointees (and directly appoints some), dismissal powers, and the moral suasion weight of his office – but that is about monetary policy, not fiscal policy or government spending,

Inflation

The National Party, in particular, has been seeking to make the rate of inflation a key line of attack on the government. Headline annual CPI inflation was 5.9 per cent in the most recent release, and National has been running a line that government spending is to blame. It is never clear how much they think it is to blame – or even in what sense – but it must be to a considerable extent, assuming (as I do) that they are addressing the issue honestly.

I’ve seen quite a bit of talk that government spending (core Crown expenses) is estimated to have risen by 68 per cent from the June 2017 year (last full year of the previous government) to the June 2022 year – numbers from the HYEFU published last December. That is quite a lot: in the previous five years, this measure of spending rose by only 11 per cent. Of course, what you won’t see mentioned is that government spending is forecast to drop by 6 per cent in the year to June 2023, consistent with the fact that there were large one-off outlays on account of lockdowns (2020 and 2021), not (forecast) to be repeated.

But there is no question but that government spending now accounts for a larger share of the economy than it did. Since inflation was just struggling to get up towards target pre-Covid, and I’m not really into partisan points-scoring, lets focus on the changes from the June 2019 year (last full pre-Covid period). Core Crown expenses were 28 per cent of GDP that year, and are projected to be 35.3 per cent this year, and 30.5 per cent in the year to June 2023 (nominal GDP is growing quite a bit). That isn’t a tiny change, but…..it is quite a lot smaller than the drop in government spending as a share of GDP from 2012 to 2017. I haven’t heard National MPs suggesting their government’s (lack of) spending was responsible for inflation undershooting over much of that decade – and nor should they because (a) fiscal plans are pretty transparent in New Zealand and (b) it is the responsibility of the Reserve Bank to respond to forecast spending (public and private) in a way that keeps inflation near target. The government is responsible for the Bank, of course, but the Bank is responsible for (the persistent bits of) inflation.

The genesis of this post was yesterday morning when my wife came upstairs and told me I was being quoted on Morning Report. The interviewer was pushing back on Luxon’s claim that government spending was to blame for high inflation, suggesting that I – who (words to the effect of) “wasn’t exactly a big fan of the government” – disagreed and believed that monetary policy was responsible. I presume the interviewer had in mind my post from a couple of weeks back, and I then tweeted out this extract

I haven’t taken a strong view on which factors contributed to the demand stimulus, but have been keen to stress the responsibility that falls on monetary policy to manage (core, systematic) inflation pressures, wherever they initially arise from. If there was a (macroeconomic policy) mistake, it rests – almost by definition, by statute – with the forecasting and policy setting of the Reserve Bank’s Monetary Policy Committee.

I haven’t seen any compelling piece of analysis from anyone (but most notably the Bank, whose job it is) unpicking the relative contributions of monetary and fiscal policy in getting us to the point where core inflation was so high and there was a consensus monetary policy adjustment was required. Nor, I think, has there been any really good analysis of why things that were widely expected in 2020 just never came to pass (eg personally I’m still surprised that amid the huge uncertainty around Covid, the border etc, business investment has held up as much as it has). Were the forecasts the government had available to it in 2020 from The Treasury and the Reserve Bank simply incompetently done or the best that could realistically have been done at the time?

Standard analytical indicators often don’t help much. This, for example, is the fiscal impulse measure from the HYEFU, which shows huge year to year fluctuations over the Covid and (assumed) aftermath period. Did fiscal policy go crazy in the year to June 2020? Well, not really, but we had huge wage subsidy outlays in the last few months of that year – despite which (and desirably as a matter of Covid policy at the time) GDP fell sharply. What was happening was income replacement for people unable to work because of the effects of the lockdowns. And no one much – certainly not the National Party – thinks that was a mistake. In the year to June 2021, a big negative fiscal impulse shows, simply because in contrast to the previous year there were no big lockdowns and associated huge outlays. And then we had late 2021’s lockdowns. And for 2022/23 no such events are forecast.

One can’t really say – in much of a meaningful way – that fiscal policy swung from being highly inflationary to highly disinflationary, wash and repeat. Instead, some mix of the virus, public reactions to it, and the policy restrictions periodically materially impeded the economy’s capacity to supply (to some unknowable extent even in the lightest restrictions period potential real GDP per capita is probably lower than otherwise too). The government provided partial income replacement, such that incomes fell by less than potential output. As the restrictions came off, the supply restrictions abated – and the government was no longer pumping out income support – but effective demand (itself constrained in the restrictions period) bounced back even more strongly.

Now, not all of the additional government spending has been of that fairly-uncontroversial type. Or even the things – running MIQ, vaccine rollouts – that were integral to the Covid response itself And we can all cite examples of wasteful spending, or things done under a Covid logo that really had nothing whatever to do with Covid responses. But most, in the scheme of things, were relatively small.

This chart shows The Treasury’s latest attempt at a structural balance estimate (the dotted line).

In the scheme of things (a) the deficits are pretty small, and (b) they don’t move around that much. If big and persistent structural deficits were your concern then – if this estimation is even roughly right – the first half of last decade was a much bigger issues. And recall that the persistent increase in government spending wasn’t that large by historical standards, wasn’t badly-telegraphed (to the Bank), and should have been something the Bank was readily able to have handled (keeping core inflation inside the target range).

The bottom line is that there was a forecasting mistake: not by ministers or the Labour Party, but by (a) The Treasury, and (b) the Reserve Bank and its monetary policy committee. Go back and check the macro forecasts in late 2020. The forecasters at the official agencies basically knew what fiscal policy was, even recognised the possibility of future lockdowns (and future income support), and they got the inflation and unemployment outlook quite wrong. They had lots of resources and so should have done better, but their forecasts weren’t extreme outliers (and they didn’t then seem wildly implausible to me). They knew about the supply constraints, they knew about the income support, they even knew that the world economy was going to be grappling with Covid for some time. Consistent with that, for much of 2020 inflation expectations – market prices or surveys – had been falling, even though people knew a fair amount about what monetary and fiscal policy were doing. In real terms, through much of that year, the OCR had barely fallen at all. It was all known, but the experts got things wrong.

Quite why they did still isn’t sufficiently clear. But, and it is only fair to recognise this, the (large) mistake made here seems to have been one repeated in a bunch of other countries, where resource pressures (and core inflation) have become evident much more strongly and quickly than most serious analysts had thought likely (or, looking at market prices, than markets themselves had expected). Some of that mistake was welcome – getting unemployment back down again was a great success, and inflation in too many countries had been below target for too long – so central banks had some buffer. But it has become most unwelcome, and central banks have been too slow to pivot and to reverse themselves.

Not only have the Opposition parties here been trying to blame government spending, but they have been trying to tie it to the 5.9 per cent headline inflation outcome. I suppose I understand the short-term politics of that, and if you are polling as badly as National was, perhaps you need some quick wins, any wins. But it doesn’t make much analytical sense, and actually enables the government to push back more than they really should be able to. Because no serious analyst thinks that either the government or the Reserve Bank is “to blame” for the full 5.9 per cent – the supply chain disruption effects etc are real, and to the extent they raise prices it is pretty basic economics for monetary policy to “look through” such exogenous factors. It seems unlikely those particular factors will be in play when we turn out to vote next year.

Core inflation not so much – indeed, the Bank’s sectoral core factor model measure is designed to look for the persistent components across the whole range of price increases, filtering out the high profile but idiosyncratic changes. Those measures have also risen strongly and now are above the top of the target range. That inflation is what NZ macro policy can, and should, do something about. But based on those measures – and their forecasts – the Reserve Bank has been too slow to act: the OCR today is still below where it was before Covid struck, even as core inflation and inflation expectations are way higher. Conventional measures of monetary policy stimulus suggest more fuel thrown on the fire now than was the case two years ago.

When I thought about writing this post, I thought about unpicking a series of parliamentary questions and answers from yesterday on inflation. I won’t, but suffice to say neither the Minister of Finance, the Prime Minister, the Leader of the Opposition, or Simon Bridges or David Seymour emerged with much credit – at least for the evident command of the analytical and policy issues. There was simply no mention of monetary policy, of the Reserve Bank, of the Monetary Policy Committee, or (notably) the government’s legal responsibility to ensure that the Bank has been doing its job. It clearly hasn’t (or core inflation would not have gotten away on them to the extent it has). I suppose it is awkward for the politicians – who wants to be seen championing higher interest rates? – and yet that is the route to getting inflation back down, and the sooner action is taken the less the total action required is likely to be. With (core) inflation bursting out the top of the range, perhaps with further to go, the Bank haemorrhaging senior staff, the recent recruitment of a deputy chief executive for macro and monetary policy with no experience, expertise, or credibility in that area, it would seem a pretty open line of attack. Geeky? For sure? But it is where the real responsibility rests – with the Bank, and with the man to whom they are accountable, who appoints the Board and MPC members? There is some real government responsibility here, but it isn’t mainly about fiscal policy (wasteful as some spending items are, inefficient as some tax grabs are), but about institutional decline, and (core) inflation outcomes that have become quite troubling.

Since I started writing this post, an interview by Bloomberg with Luxon has appeared. In that interview Luxon declares that a National government would amend the Act to reinstate a single focus on price stability. I don’t particularly support that proposal – it was a concern of National in 2018 – but it is of no substantive relevance. Even the Governor has gone on record saying that in the environment of the last couple of years – when they forecast both inflation and employment to be very weak – he didn’t think monetary policy was run any differently than it would have been under the old mandate. That too is pretty basic macroeconomics. It is good that the Leader of the Opposition has begun to talk a bit about monetary policy, but he needs to train his fire where it belongs – on the Governor – not, as he did before Christmas, forcing Simon Bridges to walk back a comment casting doubt on whether National would support Orr being reappointed next year. In normal times, you would hope politicians wouldn’t need to comment much on central bankers at all. But the macro outcomes (notably inflation), and Orr’s approach on a whole manner of issues (including the ever-mounting LSAP losses) suggest these are far from normal times. Core inflation could and should be in the target range. It is a failure of the Reserve Bank that it is not, and that – to date – nothing energetic has been done in response.

Long live our noble Queen

On 7 February 1952, New Zealanders woke and – whether they turned on the radio or picked up the morning newspaper – only then did most learn that the previous afternoon King George VI had died, and that his daughter Princess Elizabeth was now our queen, Queen Elizabeth II. 70 years ago, before most of us were even alive.

To look at today’s New Zealand media one might suppose that some decades ago New Zealand had angrily tossed out the monarchy. There has been barely any mention of the 70th anniversary of the accession of New Zealand’s Head of State and what coverage there has been seems determined to treat it as British news, not as news about our own Head of State – she holds that office by laws passed by New Zealand’s Parliament, and polls suggest that today’s New Zealander’s still favour the system of constitutional monarchy that we share with the UK, Australia, Canada, and a variety of other countries. Much as a significant chunk of the media class might lament it, Elizabeth is our Queen, and has been for 70 years now. Whether as Queen of New Zealand or of her other realms and territories, her reign is now one of the very longest ever in recorded history. If one dates modern New Zealand from some time in 1840, she has been our head of state for almost 40 per cent of our history. A remarkable life of service.

(And, in fairness, while the media have preferred to play down any sense of Elizabeth as our Queen, the Prime Minister did put out a gracious and fitting statement.)

Anyway, I got a bit curious about how the accession of the Queen, 70 years ago, had been marked in New Zealand and recorded in the New Zealand media. Papers Past is a wonderful resource although of the major city papers sadly only the Press is available for 1952.

I started with the edition of Tuesday 5 February. In that paper it was reported that preparations were well underway for the planned visit to New Zealand in May of Princess Elizabeth and Prince Philip – undertaking the tour that the King himself had originally hoped to do. The Assistant Comptroller of the Royal Household had arrived on the 4th “to discuss final details and matters of etiquette. The economist is me could not, however, help noticing this element of the story.

It was a different time indeed, when the Cabinet was allocating cement.

The arrival of the Princess and her husband at the Kenyan lodge, where she was receive the grim news of the death of her father, was recorded in another story in which it was noted that the Queen and the Duke had attended Evensong at the small local church where “she spoke to the man who alone laid every stone of the church”.

What of Wednesday 6 February? It was a normal working day in New Zealand (and, as far as I can see from the table of contents there were no stories about the Treaty of Waitangi or the like). The Prime Minister – Sid Holland – was in Paris. Back here there were further reports of the forthcoming royal visit, including a push to keep handshakes to a minimum, and stories from the visit to Kenya. It was mid-summer and in Dunedin the touring West Indies cricket team had just beaten Otago.

King George VI died at Sandringham in the early hours of 6 February (New Zealand time being 12 hours ahead of that in the UK). The news was announced to be public at 11am (UK time).

In those days, the front pages of newspapers still seemed to be devoted to classified advertisements. It was no different in the Press of 7 February 1952. The news of the King’s death, and of the accession of Queen Elizabeth, appeared on page 5. This appears to be the editorial, and these were the first few sentences.

The Cabinet had met as soon as our government received the news, and the acting Prime Minister (Keith Holyoake) issued a statement in the early hours of the morning.

Despite the late hour – and presumably only for later editions – there are large numbers of stories, and photos (including one of the new heir to the throne, Prince Charles) over two pages (even managing to note that the forthcoming visit to New Zealand was now cancelled). There was an article about the visit by the then Duke and Duchess of York to New Zealand – and Christchurch in particular – in 1927 (among many other details, the Duke had had dinner with Labour leader Harry Holland in Westport).

The death of the King was marked immediately by the closure of all New Zealand schools on 7 February, and the closure of all government departments (other than essential services) for the afternoon of 7 February. No doubt there were many statements by local dignitaries around the country, but this was the statement by the (Labour) mayor of Christchurch.

In Greymouth, the mayor had requested that the bell of the local Catholic church be tolled 15 times (soon after the news first came through), once for each year of the King’s reign.

By the next issue of the newspaper – that for Friday 8 February – we still got through a great deal of other news first (the cricket test began that day in Christchurch) before the best part of three pages of coverage of the royal news.

There was a thoughtful editorial, even if it was a little wide of the mark with its suggestion “many [ in New Zealand] will never see her”, given the huge crowds for her first tour of New Zealand two years later. There was news of the forthcoming New Zealand official proclamation of the accession of the Queen, to occur the following Monday (more details here from the next day’s paper). The article is well-worth clicking through to for the details of official mourning, for the suggestion that employees should as far as possible be given time off on that Monday to attend local ceremonies marking the accession. This is just one snippet

Tributes from all manner of individuals and bodies – here and abroad – flowed in, and find a place in the pages of the Press. Here is an account of official American tributes and observances. And preparations for the funeral. From the next day’s paper, many resolutions of sympathy and loyalty.

By Monday 11 February, plans were in place. The King’s funeral was to be held that Friday (the Queen had requested that the day not be a public holiday). And the Prime Minister – who had been visiting West Germany when the King died – made a broadcast to New Zealand from London. In the same article it was reported that Mr Holland would be received by the Queen on Wednesday. Meanwhile back here the Governor-General, the Cabinet, and other dignitaries had attended a memorial service at (now Old) St Paul’s in Wellington. There were reports too of the special services in the churches of many denominations. If you wanted legal detail on the accession process, the Press had it covered.

In the Press of the 12th, you could read the (quite lengthy) account of the Christchurch civic proclamation of accession ceremony held the previous day – several thousand attended that ceremony, and there were similar smaller occasions in the boroughs around the city.

On the 13th we read that both the Prime Minister and the Leader of the Opposition (Walter Nash), both of whom had already been in London, would represent New Zealand at the funeral for the King. We also read of the Queen’s own declaration in taking her oath.

Back in New Zealand, in the following day’s paper we read some remarks made by the Minister of Education at a combined (four schools) memorial service in Wellington Town Hall.

The next day’s paper was full of articles about the funeral, but also carried this report of the Prime Minister’s meeting with the Queen, including this snippet.

And on the 16th, we read of the two minutes silence in memory of the King, and of great bell in Christchurch Cathedral tolling 56 times, once for each year of the King’s life, and so much more.

It was another age in many ways, but these surely were the monarchs of New Zealand, not by force or coercion but by the free consent, and loyalty of people, high and low, of all races and religions up and down New Zealand.

As indeed, Elizabeth II today is, by free choice of our own Parliament,

“Elizabeth the Second, by the Grace of God Queen of New Zealand and Her Other Realms and Territories, Head of the Commonwealth, Defender of the Faith—”

We shall not see her like again, whether in New Zealand or in her other realms and territories. But the 70th anniversary of her accession, to our throne, should very much have been New Zealand news.