My last short post was a month ago. At that stage post-Covid it was seriously taxing to read anything more demanding than Trollope, let alone even think about writing anything.
But with time, things improve. I had even harboured thoughts of a serious post this week – the one I’d like to write is about how we assess the culpability of central banks for the current and prospective inflation outcomes.
But….I had a commitment to write a 1000 word book review for a publication I write for. I did a draft of that yesterday, and doing so so badly knocked me back I won’t be trying anything similar for a while yet.
The gist of the post would have been:
- Based on the information, understanding, and risks at the time, interest rate cuts in early 2020 were well-warranted.
- (Core) inflation outcomes (globally) are largely the outcome of monetary policy choices 12-18 months previously.
- 12-18 months previously no one was forecasting inflation (or unemployment) outcomes akin to what we actually now see (check RB forecasts, NZ private sector forecasts, or overseas official or private forecasts).
- That was a huge forecasting/understanding error, but……it is hard to hold central banks very culpable when no one much else saw the outlook any better (even if it is their specific job).
- There is much more culpability about sluggish policy responses (or lack of them) from about a year ago, as the upside risks became increasingly apparent. Central banks took a punt, which hasn’t worked out, and we are all paying the price (in NZ it wasn’t until February that the OCR got to pre-Covid levels and the Funding for lending crisis programme is still running).
- Serious scrutiny of central bank policymakers is now warranted, with a presumption against reappointment (but here two were just reappointed).
- Oh, and the massive losses to the taxpayer from the bond buying programmes – purchases often occurring well after it was clear worst-case downside outcomes were no longer likely – are something central bankers are entirely culpable for.
And the book? Two Hundred Years of Muddling Through: The Surprising Story of the British Economy by UK journalist Duncan Weldon. It is short (300 pages), accessible (even chatty), judicious, informed by the literature, and strongly recommended (especially for the period up to about 1950) for anyone who wants to know a bit more economic and economic policymaking history. I’ve read a lot in that area, and so probably didn’t learn a lot new, but was interested to learn that on the eve of World War One, not only was the UK “the dominant manufacturer of exported goods, the centre of international finance” but also “the world’s largest net energy exporter” (that was the coal).
croaking cassandra 
Michael,
Agree with your general theme but you might be underestimating the impact on inflation both here and overseas of the shipping/logistics problems mostly arising from the pandemic, via higher direct costs and shortages. One example: my daughter imports from China to USA. 20 ft container marine freight cost went from USD2500/$3000 to a peak of USD11k/12k. NZ and Australia less affected but still around 3 times normal costs. Destination costs have also risen including logistics problems resulting in higher losses in domestic shipping, in the range of 3% to 5% above previous, often uninsurable. Trucking companies unwilling to refund as in past. One small example but there are many more.
Regards
Mike
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Thanks for those comments Mike. I tend to focus on core inflation measures, but certainly recognise that headline inflation has been boosted by those transport cost and supply chain disruption effects. It isn’t sensible for the RB to try to do much to offset those, but there is plenty of core inflation pressures (linked to the unsustainably low unemployment rate) that they should have been reacting to more vigorously.
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Good to see you back. I do like your longer posts, but actually, this bullet point form still gets the gist across in a sensible way, and is quite accessible (aka short).
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Nice to see you back, and glad you’re recovering even if slowly. Whilst I like your longer posts, the short bullet point form also works quite well – it’s definitely quicker to read and makes the line of argument clear. Perhaps do some more of them for a while?
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Read Margaret Atwards book.
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I’ve read several of them
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On page 17 of this report Arthur Grimes appears to contradict what he said on Q&A (“if you are anti-immigration you are xenophobic”)?
Click to access The-wider-wellbeing-effects-of-immigration.pdf
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It is hugely disappointing that the impact of NZ inflation, particularly on the exchange rate has not been reflected in OCR adjustment by the RB. Or not in a meaningful way
They are the experts who should have predicted and accounted for the lag in economic measurement . And yet ,because of their lack of positive action, they have caused a substantial comparative fall in the exchange rate.
This is bad for NZ and also unnecessary as they had the power of better management.
Supposedly independent of Government the RB has failed to maintain stability.
Do we detect a lack of courage? And 25% RB staff allegedly have left!
NZ is now in an economic crisis ,how do we get out of it?
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When one thinks the RBNZ’s standing can’t fall any further they go out and show that it can – what was on display at the recent Select Committee hearing was northing short of a discombobulated display of revisionist nonsense.
The truth of the matter was the RBNZ were late to recognise the magnitude of the crisis in Q1 2020 (when other central banks already had), were operationally unprepared, and then launched a series of unconventional monetary policies which were both fiscally risky and unsuited to New Zealand’s financial market structure(s). As such these policies/tools did little to boost aggregate demand, and in the provision of any material ‘net benefits’ either in the short or long term – an outcome that they recognised publicly on several occasion prior to their use by the RBNZ in March 2020.
Unfortunately the RBNZ kept pouring unconventional monetary policy gasoline on the fire in H2 2021 when, given the rising upside risks, they should have been materially dialling their use back. The talk of being ‘first’ is utter hubris and jingoism intended to deflect criticism away from their actions (or lack of).
Unfortunately this obfuscation of the facts is becoming an endemic pattern of behaviour by the RBNZ’s leadership. The RBNZ has experienced staff turnover of 25% in the last 15 months…alarm bells shouldn’t just be ringing they should be screaming (with lights flashing) that something is seriously wrong with the leadership and governance at this institution.
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