New Zealand’s monetary policy mess

The New Zealand Initiative has a new report out this morning, written by Bryce Wilkinson, under the heading “Made by Government: New Zealand’s Monetary Policy Mess”. (Full disclosure: I provided fairly extensive detailed comments on an earlier draft.)

It is a curious report. There is a lot of detail that I agree with (and the report draws quite extensively on various criticisms I have made in recent years) but it ends up having the feel of a bit of a muddle.

(It is perhaps not helped by the Foreword from an Otago academic who seems wedded to a fiscal theory of the price level that doesn’t exactly command widespread support anywhere, and which would appear on the face of it to have predicted that New Zealand would have had one of the lowest inflation rates anywhere. His approach appears to absolve the Reserve Bank of responsibility for the high inflation: “the key reason why we have high inflation rates is fiscal policy and not monetary policy” and “even if the RBNZ had not made mistakes, I doubt that it could have avoided high inflation”.)

The title of the report is clearly supposed to suggest that what has gone on is primarily the government’s responsibility (and specifically that of the Minister of Finance). And there are plenty of things one might reasonably blame the Minister for:

  • changing the Bank’s statutory mandate (if you think this was a mistake, or mattered to macro outcomes, which I don’t)
  • reappointing Orr despite the opposition of the two main opposition political parties, having himself changed the law to explicitly require prior consultation with other parties in Parliament,
  • going along with the Orr/Quigley preference to prevent experts from serving as external MPC members (which still seems incredible, no matter how times one writes it),
  • appointing a weak Board with barely any subject expertise, the same board being primarily responsible for Governor and MPC appointments and for holding the MPC to account,
  • being indifferent to serious conflicts of interest in people he was appointing to the board,
  • prioritising a person’s sex in making key appointments,
  • for bloating the Bank’s budget, and
  • never once have shown any sign of unease about the massive losses the MPC-driven LSAP has run up, about the Orr operating style, or any urgency around better understanding what has gone on (you will search letters of expectation in vain for any suggestions from the Minister that, for example, more/better research capability and output might be appropriate, or that speeches more of the quality seen from other advanced country central banks might be appropriate)

and so on.  Robertson has been both an active and passive party in the serious decline in the quality of our central bank over recent years, and given that Orr has been reappointed and seems disinclined to acknowledge the validity of any criticisms, only the Minister of Finance –  current or future –  can make a start on fixing the institution.  Institutional decline –  and it isn’t just the Reserve Bank –  has been a growing problem in New Zealand, and the current government’s indifference has only seen the situation worsen: one might think too of the Productivity Commission.

But, for better or worse, when most people think of a “monetary mess” at present they probably primarily have in mind inflation.  And the way the report is structured it would seem that both the author and the Foreword writer also put a lot of emphasis on the bad inflation outcomes.  No doubt rightly so.

But there simply isn’t any compelling evidence, or really even any sustained argumentation that would stand scrutiny, that any or all of the many things one can criticise Robertson for really go anywhere towards explaining how badly things have gone with inflation (or even with the massive losses on the LSAP).  I’m not, of course, one of those who believe the Bank should escape blame –  that somehow for example (as per one of the Governor’s ludicrous attempts at distraction) we can blame it all instead on Putin or “supply chain disruptions”, as if they somehow explain the most overheated economy and labour market in decades.

But how confident can we really be that a better Reserve Bank –  on the sorts of dimensions the NZI report rightly draws attention to –  really would have made much macroeconomic difference?   As just a small example (and from a country with a similar pandemic experience) the report rightly draws attention to the better academic qualifications of the Governor and senior figures at the Reserve Bank of Australia.  But nothing about Australian inflation outcomes –  or LSAP losses for that matter –  suggests that the RBA has done even slightly better than the RBNZ in recent years.  If anything, I (the Bank’s “most persistent and prolific” critic, as the report puts it) reckon the RBA has done a little worse, even if there is a better class of people and some more thoughtful speeches.    One could extend the comparisons.  As I’ve highlighted here, New Zealand’s core inflation outcomes have been bad, but about middle of the pack among OECD countries/regions.   Fed Governors do lots of good speeches, the institution does lots of interesting research, experts are allowed to be decisionmakers, but…..core inflation outcomes are little or no better and the Fed was even slower than the RB to get started with serious tightening.  And so on, around most of the OECD.

There is –  as the report notes –  no absolute defence for Orr and the MPC in other countries’ inflation records. We have a floating exchange rate to allow us to set our own path on inflation, and just because other countries’ policymakers messed up should not absolve ours of responsibility.    But to me the evidence very strongly suggests that what happened over the last two to three years was that (a) central banks badly misunderstood what was going on around the macroeconomics of Covid, (b) so did almost all other forecasters, here and abroad, and (c) there isn’t much sign that central banks with better qualified more focused people or more open and contested policy processes did even slightly discernibly better than the others.   I wish it wasn’t so.  With all the many faults in the RBNZ system and personnel, it would be deeply satisfying to be able to tie bad outcomes to those choices (active and passive).  But I just don’t think one really can.    All those governance and style matters etc matter in their own right –  we want well-run, expert, open, engaged, accountable, learning institutions, especially ones so powerful.  And weak institutions are likely over time to produce worse outcomes in some episodes.  But there is little sign yet that this is one of those episodes.

And it is clear when one gets to his conclusion that Wilkinson more or less knows this, as he struggles to connect the very real concerns about the Bank, and what Robertson has initiated or abetted, with the most unfortunate macroeconomic/inflation outcomes.

I was going to say that it isn’t really clear either who the report is written for.  But in fact I think that is wrong, and that the primary intended audience is Nicola Willis, her boss, and her colleagues/advisers.    Thus we find this

Bryce 5

Talk about deferential and accommodating.

And the entire report ends this way

bryce 6

In terms of fixing the institution that seems largely right. It could be fixed, but it will need ministers/governments that care and that are willing to devote sustained attention to using the levers they have to gradually right the ship. As Bryce notes, many of these changes can’t be effected quickly, but mostly because the laws are deliberately (and appropriately) written to make it not easy for new governments of either stripe to make sudden or marked changes. That is helpful when the institution is working well, but quite an obstacle otherwise, and may – if a new government were to care enough – need legislative change.

(I wrote a post here last year with some thoughts on what a new government could and could not do.)

As you watch the interactions between Orr and Nicola Willis at FEC – in which Orr is routinely scornful and dismissive – you wonder how in decency he could possibly continue to serve under a National-led government, But perhaps if he were that sort of person – staying in his lane, acknowledging mistakes, open and engaging etc – the concerns would not exist in the first place. As it is, it would be hard (all but impossible under current law I’d say) to get him out if he wants to stay, and so reform efforts will need to go around him, including progressively replacing the Board with able people and ensuring that the external MPC members are both able and expected to be individually and publicly accountable for their own views and analysis. But do all that and we – and other countries – will still be at risk of really bad macro forecasting errors, and central banks unable to live up to their rhetoric, albeit we might hope for no repeats for another generation or two.

16 thoughts on “New Zealand’s monetary policy mess

  1. “In my opinion, the key reason why we have high inflation rates is fiscal policy and not
    monetary policy. Monetary and fiscal policies are bound together by a common budget
    constraint and, therefore, coordination is needed.”

    It’s difficult to weigh the comparative impact of the ZIRP and LSAP, versus the impact of insanely expansionary fiscal policy, on our ballooning inflation rate..

    Government spending doubled in nominal terms in just four years:

    2018 $81 bn = 27.6% government spending to GDP
    2022 $162 bn = 44.7% government spending to GDP

    Spending of this magnitude would have impacted the labour market, soaking up highly paid workers for bogus government roles. The demand for diversity wallah’s et al must have been through the roof.

    The sabotage of the private sector can be shown by the blow-out in the current account deficit, which now stands at 8.9% of GDP – a new record for New Zealand in our history, and the worst in the OECD.

    A current account deficit of 8.9% of GDP is a failed State figure, but was ignored by last nights news. The few commentators who deigned to mention the result were typically relaxed – it would come down because of – reasons. Magical potential increases in tourism were conjured up out of thin air. Personally, I expect this number to blow out further, with the flood rebuild, but what would I know?

    In my view, Kommissar Robbo shares the blame with Mr Orr for our inflation failures. Who is most to blame is perhaps just an academic question – they are both incompetent, and they should both be fired.

    Liked by 2 people

    • Minimum wages rising by 30% in recent years have seen my local Indian Spice Curry shop raise his prices from $12.50 pre pandemic to now almost $16 a dish. Can’t put that on the RBNZ. Indian curry shops base their margins on costs. If costs go up and the bulk of their costs are in labour costs as they import most of their ingredients from the lowest cost market in the world ie India. Chicken prices are up but lamb prices has dropped in recent months from the local New World supermarket.

      I am of the opinion that inflation is here to stay for a while. Interest rates around the world have risen far to fast and have led to recent global banking strife as Bond Values drop as interest rate rises which threatens bank stability mandates. QE is a more significant problem in Australia with a trillion dollars QE program. The question now is which bank in Australia is in strife would be ones that participated heavily in the RBA trillion dollar QE buying up Australian Treasury Bonds at 1% is now a Titanic disaster.


  2. Increasingly the problem with our institutions of State, including political parties is the emphasis on DEI when selecting senior managers, political candidates, and other functionaries. The reality is that DEI has no bias towards competency.

    Is the Minister of Finance a DEI selection? Is the Labour Government cabinet’s obvious incompetence an enevitable outcome of DEI ideology?

    Can minority candates be A class achievers, of course they can, but the problem with appointing B grade candidates is that they in turn appoint C grade staff to ensure no one outshines them and threatens their position. Eventually you end up with F’s appointing H’s.

    As long as DEI is the prevailing ideology in Government institutions and yes, sadly in large Corporates we can only expect more of the same, probably worse.

    Liked by 1 person

  3. Leaving the foreword aside, I thought Bryce’s piece was quite a good survey

    While there is perhaps no single point of failure here – the “thick of it” omnishambles comes to mind – I would not be so kind to the bank over the inflation surge. They ignored the early warning signs and failed to push the exchange rate up to help insulate us. But Robertson has been a big disappointment too – not just in this territory

    I don’t know if the integrity of the institution can ever be rebuilt from here. A huge challenge

    Liked by 1 person

    • The RBNZ was the first Central Bank to raise interest rates. So you cannot really say they were too slow. I thought they were too fast off the starting block. The NZD was riding high but of course every other Central Bank responded after RBNZ. The funny thing is the RBNZ made a mistake in their QE program starting with $100 billion planned but only executed up to $59 billion and stupidly or cleverly(not too sure by luck or by design) repaid $35 billion making NZ QE a $24 billion QE at a huge upfront cost of $5 billion. NZ Banks made mega profits during the pandemic years.

      Surprisingly the RBNZ because of it much smaller QE program means that they have been able to move interest rates up higher and faster than other Central Banks who are now dealing with the fallout of higher interest rates are devalue Bond values. We have seen 4 US banks collapse and also the demise of Credit Suisse due very much to declining bond values which affect Banks solvency positions. Credit Suisse shareholders and also Credit Suisse issue Bonds have taken a dramatic hit. The contagion now is which bank bought the most US, Euro and Australian Treasury Bonds and now also Credit Suisse issued bonds. Banking disasters unfolding which will was up on NZ shores in 6 to 12 months. Cranking up interest rates have never been a great idea. Bank stability mandates are being threatened around the world as interest rates rises.

      Personally I will not be sitting on cash deposits or bond investments.


      • The RBNZ was about the 7th OECD central bank (out of about 20) to start raising the OCR, but even those who were a bit ahead of the RB were also, with hindsight, too slow.


      • Michael, too slow around the world? Don’t forget QE. Trillions of dollars of US, Euro, Aus Treasury Bonds were issued at lower than 1% interest rates or negative interest rates. As interest rates rise guess what happens? those bond holdings sharply devalue. Don’t forget banks were forced into buying Treasury Bonds at much lower interest rates with the expectation that Central Banks will keep interest rates low but unfortunately the original designers of QE have retired. Jumping from non traditional monetary policy back to traditional monetary policy is going to crash bank balance sheets. Central Banks have forgotten their key mandate ie bank stability.


      • Outside the US banks generally don’t hold long term bonds, and if they do they hedge the interest rate risk (true in NZ and Aus, but also in most of the rest of the advanced world). There is significant exposure to higher long-term interest rates but it mostly isn’t directly in the balance sheets of banks (US cases like SVB being the exceptions).


      • I am hearing rumours already that there are Australian banks under pressure due to the trillion dollar QE undertaken. It does not take much for a bank run to occur. Interest rate rises in Australia is rumoured to have hit a brick wall as bank stability risks are being considered by the RBA.


      • Credit Suisse is not a US bank and it just collapsed due to Eurobond holdings crashing as interest rates rises.


      • “The collapse of Silicon Valley Bank didn’t cause Credit Suisse to stumble, but it did put the Swiss bank under even more intense scrutiny. And it may have super-charged the selloff that brought Credit Suisse to its knees.

        Meanwhile, European and US banks are dealing with similar macroeconomic environmental factors. After years of ultra-low (and in Europe’s case, even negative) interest rates, yields on government bonds including Treasuries have shot up, eroding the value of banks’ underlying assets.”


    • Former Soviet bloc countries have in many cases built good institutions with high integrity so – pessimist that I often am – I’m not quite as pessimistic as your last line Peter!


  4. Clearly, there is something rotten at the core of mainstream economic theory (MMT, Keynesianism). How many boom/busts will it take before they realise that Ludwig von Mises/Austrian School are right. Stop using our interest rates (i.e. money) as a “policy tool” and allow the market to establish the price of time. Anything else is interventionist.


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