For a long time I’ve been a strong supporter of central bank transparency about stuff a central bank actually knows something about, but a sceptic of the faux transparency of publishing stuff a central bank really knows very little about. In the former category, one might think of the background papers going to the MPC (by aiming deliberately low I once got them out of the Bank for a forecast round 10 years previously, but good luck if you asked now for the papers around the 2020 and 2021 decisionmaking, let alone those from six months ago). In the latter category I primarily had in mind medium-term macroeconomic forecasts, including endogenous forecasts for the OCR. Sure, the numbers are mostly put together fairly honestly, but in truth (and this isn’t a criticism, more a description of the limitations of human knowledge) central banks just don’t know very much about the future, especially a couple of years ahead. In principle, an OCR forecast now for the end of 2026 would be drawing on forecasts for inflation pressures well out into 2028. Forecasting 2024 or 2025 remains a considerable challenge.
But my criticisms there have typically been about the hubris or delusion involved in thinking one could add meaningful value re where things might be a couple of years hence. In fact, I was rereading this morning an old piece I used at a BIS conference years ago on such issues. But I tended to be relatively more relaxed about near-term forecasts, for (say) the next quarter or two, included the associated guidance on likely policy. If one might still be sceptical about just how good central banks might be at nowcasting or near-term forecasting (a) they do have more resource to throw at the issue than any other forecaster, and b) they should at very least know a little more than we otherwise do about their own reaction functions (ie how they might react to any given set of economic/inflation data). That might be so whether one had in mind explicit near-term OCR forecasts (to the second decimal place) as the Reserve Bank does, or just “bias statements” of the sort pretty much all central banks tend to engage in.
Here in New Zealand, even with some new and (apparently) improved external membership of the MPC, the last six months don’t score very well even on that count.
It was less than five months ago (22 May in fact) when the MPC released a Monetary Policy Statement indicating, in their forecast track, that there was a bit better than even chance that the next warranted move in the OCR would be an increase this year (to be consistent with this track, probably in August).
Their associated communications (which I’ve written about previously) was so at-sea that they tried to deny the implications of their own chosen track (the chief economist even tried to blame it on the tools, rather than the MPC of which he was a part).
Within six weeks, (without a new full set of forecasts, and in the absence on holiday of the chief economist), the MPC had flipped to a dovish stance. This was how I illustrated it at the time
And on this occasion they more or less did follow through. There wasn’t any huge inconsistency between their July and August statements (and the associated 25 basis point cut in the OCR).
But this was the forecast track in the August MPS, published only six weeks ago
That forecast track was exactly consistent (weight by days) with 25 basis point cuts in October and November, such that it was clearly intended by the MPC as specific forward guidance. It looks as if they envisaged another 25 basis point cut in February such that by then the OCR would have been lowered to 4.5 per cent.
And yet yesterday we saw a 50 basis point cut, and a fairly high degree of confidence among market economists that another 50 points will follow next month. One can argue that there wasn’t a clear direct signal of that from the MPC, although when you put a big headline in the “minutes”, and explicit statements that a) inflation is expected to “remain” around the target midpoint, and b) that an OCR of 4.75 per cent is still “restrictive”, it doesn’t take much guessing to see what they had in mind yesterday (especially with the three month MPC summer holiday coming up).
Now, as it happens, I think yesterday’s OCR cut was most likely to right call in substantive macroeconomic terms (and still think we are probably heading towards 2.5 per cent by the second half of next year). But that isn’t the issue for this post. Rather the point was nicely summed up by a journalist’s tweet yesterday
Which is a pretty damning indictment, of a committee whose claims to exercise such great discretionary power is that they are technically expert and have some reliable/predictable idea of what they are doing. And that simply isn’t obvious at present.
No one particularly minds when central banks change their mind when there is some significant exogenous shock, the size or timing of which they could not reasonably have anticipated. But it is far from clear that anything very much has changed about the economic backdrop since May (no really big data surprises on GDP or unemployment, and confidence measures seem to have bounced around a bit without leaving us in a lot different place than in early May, let alone August). Instead, the expert committee, drawing on its staff, seem simply to have gotten things very wrong, and to have seriously misread the extent of the disinflation that was already well in train (or at least so they assume, having anticipated yesterday the CPI numbers out next week). It doesn’t seem so different (though probably less severe) than the mistake they made in 2020/21 and even early 2022.
If the MPC really can’t do better than that there are two options. Either they aren’t the men and women for the job (in several cases that seems quite likely) or they should stop just injecting random noise purporting to be expert judgement by publishing forward tracks and indications of what might happen next. And, of course, there is no indication in any of the published sets of minutes from May to now of any robust debate or disagreement among MPC members, which is simply additionally damning: they all went along with each of the flip flops and inconsistencies through time, with no indication that any of them were applying the intellectual energy and analytical grunt to contest and challenge whatever view was coming from staff or management. I’ve long argued for much more personal accountability for MPC members – the risk has always just been that individuals (whether inexpert internals or the externals) would just free-ride, go along for the status, the fee, the addition to the CV, while adding little, and not bearing any consequences when the overall MPC does poorly. Management hates the idea of an open contest of ideas – has ever since reform models started being explored a decade ago – and one of their worries was of a “cacophony” of voices, in which truth would be obscured. It was never a compelling argument – other central banks manage, and it was a clearly an argument that reflected mostly management self-interest – but the experience of the last six months highlights again just how little “truth” or knowledge there is in anything much the MPC says beyond the specific OCR adjustment on a specific day. An open (but respectful) contest of ideas, exploration of alternative models, could hardly be worse than what’s been on offer again this year.
croaking cassandra 
The NZRB has definitely been caught with it’s pants down in terms of assessing the outlook for the NZ economy. But were there forecasts that different to any of the other forecasters out there? Or was everyone thinking the same thing using the same data and modelling?
Like a lot of economists I think the MPC missed or overlooked the likely impact of a significant contraction in current and projected government spending. It’s hard to understand why it was missed given that it was well signaled in advance. It’s possible the MPC was caught off guard by the severity of the new governments contractionary fiscal actions or they didn’t consider them to be a factor in their forecasts. I can’t think of any economist – apart from some fringe bloggers – who predicted the severity or sharpness of the downturn in NZ.
Any Keynesian can immediately tell you why the economy has tanked much harder than many expected and why it will likely remain that way for longer than many predict.
The obsession with monetary policy as the singular tool available for managing economic performance feels like only half the story. At some point fiscal policy is going to have to play a part or their will not be sufficient ‘new money created’ (private sector income) to get growth going again. I think the current government knows this but they aren’t allowed to say it out loud. Here’s a prediction – lower interest rates will not be enough to stimulate economic growth in NZ (apart from buying and selling existing housing stock) and the government will need to step in with different rushed and unplanned fiscal policies in order to increase demand and prevent severe long term damage.
In fact they already doing this – as per the new policy to under write housing developments mentioned in your previous article. Imagine the government buying and owing thousands of unsold houses in newly developed suburbs around NZ. The Tax Payers Union will be apoplectic. But this is what the new ‘fiscally conservative’ government is doing and they will do more of over the next couple of years – if my MMT calculations are valid and correct.
LikeLike
Just two quick points in response:
– by May I’m not aware that any private forecasters were talking up possible rate hikes. But you do make a fair point that private forecasters often get things wrong too. The difference is that central banks tend to hold themselves out as being able to comment intellligently on the future. My suggestion is that central banks, and possibly private commentators too, should adopt some more humility. In practice, policy is often/mostly made by looking out the window and just getting a rough sense of how things are right now.
– people much overstate the importance of rhe spending cuts (incl because the recessionary times were well underway last year) because this year the effect of the spending cuts is sligjhtly outweighted by the effects of the tax cuts. Tsy’s estimate is that this year’s Budget was modestly stimulatory.
LikeLike
The new National/Act/NZFirst government cuts and the speed of the implementation of the cuts have certainly been quite a surprise to be fair to the RBNZ. Usually it is a slow grind towards getting anything done as the new ministers settle into their respective portfolios. The no nonsense approach is more typical of new leadership in the private sector which is quite refreshing and it is certainly a welcome change from this Chris Luxon National led coalition government.
LikeLike
I think this depends on how you understand the economy – I’m interested to know why you think the abrupt contraction in government spending would not have a significant impact on the economic outlook. We are talking about the loss of thousands and thousands of jobs across the public sector and the building and construction sectors directly and almost immediately plus the indirect impact on supporting services. That is millions and millions of dollars in private sector income that has been removed from the economy in a few short months and into the future.
How an earth does an average $5 a week tax cut make up for that?
LikeLike
The numbers just add up in total. The spending cuts (savagely) affect a few thousand public servants while the tax cuts (and the interest deducitbility changes) affect a lot more people, individually to a smaller extent but…the numbers add up. I suspect the picture will be different next year: this year’s Budget made no steps to close the fiscal deficit, but on the govt’s stated intentions next year’s will.
LikeLike
Yes I can understand that mathematically – the outcome is fiscally neutral or stimulatory. And yes the governments plan to continue cuts to government spending is really where the rubber meets the road in terms of the economic debate. MMT predicts this will lead to – at best – a weak or stagnating economy as the economic historic record would indicate for most advanced economies.
As it happens I follow UK politics and what is striking is that Nicola Willis and Rachel Reeves – the UK finance minister – have been in rhetorical lockstep so it will be interesting to see the UK Budget at the end of this month. Note that Reeves has already hinted at changing the fiscal rules in order to borrow more and invest for growth.
My prediction is that Willis will do the same if the economy doesn’t pick up. I don’t understand how it’s politically possible to deliver austerity and a shrinking economy but saying that the Conservatives did it for 14 years in the UK and Milei is doing it in Argentina. And the current government is continuing to poll well so who am I.
LikeLike
I guess there probably isn’t much difference in where on the political spectrum Willis and Reeves sit.
LikeLike
Yep – kind of spooky – it’s like the same person is running the finances of both countries and as if to prove my point a heading in the Guardian this morning – “UK must prepare for widespread road pricing, says infrastructure tsar” – is that Chris Bishop? No – it’s his avatar twin in the UK.
LikeLike
I mean my general impression of Willis is that she could as easily slot into the Labour Party. But, more generally, there is a lot of sense in road pricing at point of use, and it is increasingly common abroad under govts of all political stripes.
LikeLike
Will Nicola Willis do the same as her avatar twin in the UK? Also from the Guardian:
“Reeves has done little since Labour’s party conference in Liverpool to quash speculation that she will relax the debt rule. This would unlock headroom to increase funding for capital investment – but not without risk as it could unsettle financial markets.”
I think she will have to or endure a long period of low/no economic growth and rising public debt as tax revenue stalls.
LikeLike
Remember that we don’t really have a debt rule here and to there extent there is much focus on particular benchmarks, it has been the date for a return to operating balance. As that date has been pushed out repeatedly by both Robertson and Willis, it would now surprise me if it weren’t pushed out again.
That said, the effective cyclical stabilisation tool is monetary policy.
LikeLike
I thought they were effectively doing the same thing – isn’t Willis aiming to balance the books (spending <= tax revenue = no deficit or a surplus) so that she can reduce ‘the debt’ – (the amount of safe harbor savings accounts for the private sector – bonds) over time? Have I got that right?
LikeLike
I don’t think there is any very binding debt target in mind. Suspect the main focus is getting back to balance (eventually), which might contribute to debt/GDP falling over time.
The situation here is quite different from the UK including because of the role of the Office for Budget Responsibility (but also because no one seriously argues in NZ that current debt levels are threatening – some of us might think them unwise- whereas the UK has pushed those boundaries further, and had the Liz Truss bond market “crisis”
LikeLike
Yeah – the Truss moment – it was the pension funds that were exposed and presented a serious risk to the UK when the demand for UK bonds fell … but who came to the rescue and ‘found’ 60 Billion Pounds to buy up those bonds? Our magic MMT friend the UK Reserve Bank and it’s ability to create new money out of thin air whenever needed for what ever the economy requires at any given time. I apologize if the MMT schtick gets annoying but I see it in nearly every macro economic event that comes my way. Also, please correct me when I’m factually in error – I’m aiming to learn and develop creditable and convincing communication skills in economics.
Yes I understand that the UK has a far higher debt to GDP ratio than NZ. Willis is aiming for 20-40% ratio and I don’t think we’re far off the top end of that now.
LikeLike
Credible not ‘creditable’ – fail right there.
LikeLike
The first factual mistake that most economists have made over quantitative easing is the reference to money printing. Complete nonsense. This has come about with not understanding how to read a simple Balance Sheet. Note that the reference to Cash Settlement account seems to indicate that a increase to that account is actually money printing. No it is not. The Cash Settlement Account on a Central Banks books is a Liability account ie Cash is owed. It is effectively a loan account and not a cash asset account.
LikeLike
I have no idea what a CSA is so asked ChatGPT – it sounds like the reserve bank provides a service to big banks and financial institutions for inter bank transactions.
“In summary, a Cash Settlement Account is vital for the smooth functioning of the interbank payment system, providing liquidity, reducing risks, and supporting the Reserve Bank’s monetary policy efforts in New Zealand.”
More generally on the point of the reserve bank being in debt or owing money – it can always create the money it needs to settle it’s debts – which is why investors like government debt – because it’s considered a safe asset effectively a savings account provided by the reserve bank to the private sector.
The money paid to the Treasury when bonds are purchased is not used to fund government spending. In WW2 the allied governments didn’t issue bonds and wait with fingers crossed for the private sector to fund the war effort. The money needed was created and spent – government bonds were issued to take money out of the economy temporarily to prevent inflation as the government bought up all the resources – factories and labor etc. The phrase ‘help fight inflation’ was used to promote the ‘savings’ bonds at the time.
Further – ‘a government deficit = non government surplus’ at the macro-economic level (for sovereign currency issuing states who only issue ‘debt’ in their own currency). If governments run surplus’s for too long the private sector has to run a deficit by taking on more debt and this leads to recessions.
This is all excellently explained in a new MMT documentary ‘Finding the Money’ – please watch this if you an interest in economics. It will turn your world view upside down and then inside out.
Another way to think about ‘government debt’ (bonds, treasuries) is that they are private sector savings sitting in accounts at the reserve bank – in accounting terms government bonds are a private sector asset – an asset that is considered to be extremely safe.
LikeLike
I repeat. Settlement Cash Account on RBNZ books is a liability account. During QE, or the LSAP bond purchase program. The RBNZ created debt. The Book entries are very simple.
Debit LSAP bond Purchase $59 billion
Credit Cash Settlement Account, a liability account $59 billion.
The RBNZ can create unlimited cash but it chose not to do so because that would create a massive uncertainty and decline in the NZD. Most of what you copied and vomited out, is just economic jargon for, you have no clue how the real world works so you make up economic jargon. You do realise Chat GPT is completely clueless as it copies a bunch of clueless economists?
LikeLike
I repeat my earlier point – government bonds are private sector savings they are not a loan that the government requires to fund its activities. Yes, it may be recorded as a liability in the RBNZ accounts, but it is a liability that can always be repaid. Investors view bonds the safest asset in any portfolio.
The CSA might technically be a liability – but more importantly it is a liquidity and settlement service that the RBNZ provides to the commercial banks. Much like all of what the RBNZ does in general – providing vital support and backing to the private sector.
Maybe I do have no idea about how the real world works but I’m learning, and the case made by MMT is far more convincing than the general economic discourse – particularly because it can be backed up by historic economic data and facts.
If you can bring yourself to do it – watch the MMT documentary ‘Finding the Money’ – the ‘clueless economists’ include Stephanie Kelton, Warren Mosler (US Treasury bond trader and founder of MMT) and L Randal Wray and they explain – not a theory – but the operational mechanism of a fiat currency issuing state. They also point to very interesting historical instances of fiat currencies and the real nature of money.
These are things that are not well understood, modelled or discussed in standard economic analysis and commentary. If you watch the film or take the time to understand what MMT is saying you will not be able to reverse that understanding or go back to your previous view of the economy.
LikeLike
This discussion started with your comment about Money Printing and QE. My lesson to you is that there was no money printing in QE. It was debt driven pretty much replicated by all Central Banks ie the RBNZ borrowed by buying existing Treasury bonds from Banks and Superannuation funds and giving every participant a IOU via the Settlement Cash Account. In effect a loan to the RBNZ to buy Treasury Bonds. Stop watching the economic jargon if you actually want to understand the real world and go back to Financial basics.
From an Accountant’s perspective it was a simple journal entry. Of course behind the scenes are the agreements and conditions of that loan which includes paying interest on the Settlement Cash Account, the Funding to Lending program at low interest rates.
The RBNZ paid a hefty price. $59 billion to buy up $54 billion in NZ Treasury bonds from the Banks and Super funds. The RBNZ in buying up $54 billion in Treasury bonds from the market it left a vacuum which the Government filled its coffers for the Covid Pandemic by issuing new low yielding Treasury bonds. That is basically how the RBNZ forced interest rates down close to zero.
The problem now is managing the interest rate risks, the devaluation in the Treasury bonds with Banks and the Super funds holds and unwinding its own position which the RBNZ is doing by selling it back to the government at a rate of $5 billion a year.
What is interesting is that the RBNZ in the process of unwinding its position it created the opportunity for the government to buy up 100% of Kiwibank which was previously owned by NZ Super fund and ACC in a behind the scenes bailout. These 2 funds would have been highly exposed to buying up new Treasury bonds at close to zero interest yield, the RBNZ in raising interest rates would have decimated these funds.
LikeLike