“We were one of the first central banks in the world to be tightening; we were one of the first central banks in the world to be easing”
Those were Adrian Orr’s words last Thursday to Parliament’s Finance and Expenditure Committee at their hearing on the Bank’s latest Monetary Policy Statement. He’d been asked by National MP Dan Bidois what the Bank was doing to learn from too slow tightening a few years back and, perhaps, too slow easing last year. Orr’s words above are at about 23.50 here.
Orr has run the “we were one of the first to tighten” lines repeatedly in the last few years, but I hadn’t heard the (even more preposterous) claim about being one of the first to ease before.
In various posts I’ve noted that his claim re tightening is simply false. But that point has often been buried in longer posts. So this post is devoted solely to those two factual claims.
I’ve focused here mainly on the central banks of OECD countries. There are 37 (more or less) advanced economy countries belonging to the OECD. But a fair number of those use a single currency (the euro), and one other (Denmark) pegs its exchange rate to the euro, and thus has monetary policy in effect set by the ECB.
That leaves 21 central banks responsible for setting monetary policy.
Of those central banks, two did not cut policy rates as Covid broke over the world in 2020 (Japan and Switzerland). So questions of reversing the Covid policy rate cuts didn’t arise there (and, for example, in Switzerland core inflation was to peak at just over 2 per cent).
The Reserve Bank of New Zealand’s first OCR increase, beginning to reverse the Covid easing, was on 6 October 2021. On the same day (but 12 hours or so later, given time zones) the central bank of Poland also put in place its first post-Covid tightening.
The following OECD countries had already increased policy rates by then
So that was nine OECD central banks moving before the Reserve Bank did, and quite a range of countries too: Latin Americans (in the case of Chile, a longstanding inflation targeter), both old and new OECD European countries, and Turkey. Countries richer and more productive than us and countries poorer and less productive than us. You might be inclined to discount Turkey, as having had some really crazy monetary management in the last few years (and I’d probably agree) but it still leaves eight of 20 moving in advance of the Reserve Bank.
So that leaves 10 moving after the Reserve Bank (including the two central banks – Switzerland and Japan – that had never cut in the first place).
The Governor’s claim that the Reserve Bank was “one of the first in the world to tighten” is simply false. And when I looked around a few other (non-OECD) countries with floating exchange rates, and thus their own monetary policies, it wasn’t hard to find several of them that had also begun to tighten before the Reserve Bank (eg Brazil in Feb 2021, Uruguay and Paraguay in Aug 2021, and my old stamping ground Zambia in Feb 2021).
It is just made-up stuff. Said once it might have been pardonable – anyone can make mistakes, and a few Anglo-centric market commentators abroad had run similar lines (noting that the RBNZ had moved before peers in the UK, Canada, US, the euro-area, and Australia) – but when run repeatedly and shamelessly it is really inexcusable.
What about “we were one of the first central banks in the world to be easing”?
Well, that one doesn’t stack up either. The Reserve Bank’s first OCR cut was 14 August 2024.
Among OECD central banks, the following had already cut by then (the first five of them in 2023)
That’s 12 central banks (including the Bank of Canada, Bank of England, and the ECB)
Turkey had also cut early but that was getting into their really crazy period, so I’ll simply leave them out.
So of the 20 OECD central banks ex Turkey only 7 hadn’t cut by the time the Reserve Bank of New Zealand made its first cut in August.
You can believe the Governor, or the hard data (and all this is really easy to check).
As I’ve pointed more than once, the whole thing is absurd anyway. It isn’t as if every country faces the same pressures or inflation risks, so it isn’t as if there is some unconditional cross-country race to tighten or cut first.
But, as it happens, the Reserve Bank probably isn’t too keen on people digging even a little below the surface either. As I’ve noted previously, on IMF estimates New Zealand had the most overheated economy post-Covid of any advanced economy they do estimates for. That was on the Reserve Bank – monetary policy is supposed to be adjusted pre-emptively to minimise such overheats (and deep slumps) – and all else suggests they in fact should have one of the very first central banks to tighten. They weren’t.
On the Bank’s own estimates, they let an output gap of almost 4 percentage points (at peak) of GDP build up, so that excess demand enabled by them was a big part of the New Zealand inflation failure.
And, as just one illustration, consider the situation faced by the Bank of Canada and the Reserve Bank of New Zealand in late 2021 (I choose BoC mostly because they make their data readily accessible).
This BoC chart shows their estimates for the output gap at the end of 2021. At the time, they thought there was still a small negative output gap, and even now with the benefit of hindsight they think the output gap was about 1.2 per cent of GDP.
What of the RBNZ? They thought at the time (November 2021 MPS) that the output gap was already slightly positive (having fallen back from mid-year estimates in excess of 2 per cent due to the fresh lockdowns) and they now estimate – again with the benefit of hindsight – that the output gap then was about 3 per cent of GDP. If the output gap was already positive there was no good justification for policy rates still being well below neutral. If the output gap was really highly positive, they had simply badly misread in real-time the inflation pressures in the economy (note also that the NZ unemployment rate by late 2021 was far below any estimates of NAIRU).
Very few central banks handled the last five years particularly well. The Reserve Bank of New Zealand was not among them. Possibly, on substance, it was not that much worse than the median of its peers (time will still tell on emerging on the other side successfully).
But what marks the Reserve Bank out is the repeated fabrications. The Governor just makes stuff up, running the same misleading or false stuff repeatedly, including to Parliament. And his (past and present) fellow MPC members – statutory officeholders all of them – let it pass (none of them speaks). As, it seems, do those charged with holding Orr to account, notably the Reserve Bank’s Board and the Minister of Finance (who last year reappointed the Board chair after the policy failures and outrageous attempts at misleading the public and Parliament of the Governor and MPC were already well known, and who has chosen not to fill vacancies on the Bank’s Board).
It is, sadly, an age when a US President can simply lie about who was responsible for invading Ukraine. We shouldn’t have to put up with such Trumpian debauched behaviour from anyone in New Zealand public life. But that is what we get from the Governor. It reflects poorly on all those who accommodate him. It reflects poorly on New Zealand. But most of all it reflects poorly on the Governor himself, who repeatedly shows himself just not fit to hold the office.
croaking cassandra 
Thank you Michael. Is not the real point that so much of our life today is founded on lies, that we have become inured to them. Only months ago we had the findings of the Abuse in Care Commission yet not one of those who was responsible for the untruths around that, nor those who told lies about torture to the UN, nor those who actively and persistently silenced public knowledge and denied the truth of what was happening, has been held to account. It would just be too painful for the leadership of our country, for that is who they were!
What other lies are being perpetrated? Covid? The covid vaccine? Climate change? Men becoming women? Unless we are prepared to acknowledge truth and act on it when it stares us in the face, we will have the likes of our Reserve Bank friends, our leaders of whatever colour, saying whatever they like and getting away with it.
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Much to be said for that, esp in respect of the state abuse stuff. I guess at least they had a Royal Commission about that, even if no one paid a personal price.
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I think it is just part of the new world where “one of the first” is now defined as just one of everyone.
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The dog ate my homework
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sorry just testing 1234
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There was an earlier era where parents actively discouraged and even punished their children for telling lies. Now, anything goes, even our Universities encourage and even reward the efforts of those who simply make up stuff and lie through their teeth to support their work.
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Your case is well supported, and you seem legitimately vexed by Adrian Orr’s behaviour. My push back to this would be ‘is this a major economic issue?’ If overall and within the margin of error, the banks actions have achieved the intended outcome?
A critique of the actions the NZRB took with counter examples of alternate actions and the different possible outcomes these may have had would be generally more useful in terms of economic debate.
I’d also love to read more analysis of fiscal policy and how this interacts with monetary policy. In NZ economic circles there’s a giant macro-economic elephant in the room that no-one ever discusses and it’s the largest investor and employer in the NZ economy – the government. For some inexplicable reason this cannot be discussed or mentioned in any analysis of the NZ economy.
Can you explain why that is? I find it disturbing TBH.
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The RB hasn’t achieved its goal (recall the high inflation of the last few years) but this post was about honesty and integrity in public office. The specific example I illustrated is clear and pretty easy to understand. There are many other examples of Orr misleading Parliament, which is a serious thing in its own right.
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Thanks for your reply. Yes, I agree that integrity and honesty are important but most of us are innately flawed and fail in many, many ways. It is a credit to your knowledge and insight that you are able to follow this at such a detailed level – most of us miss the finer grained details especially in economics.
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We are all human and thus all flawed. We don’t deliberately and repeatedly set out to mislead those to whom we owe responsibility (and if we do one or twice and are caught doing so, we express contrition and seek to make amends – the decent ones among us anyway)
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Integrity and honesty are not just important; they are essential. A dishonest person is one who seeks to defy reality. Michael’s examples are the public examples. Probably the disasters under Orr’s watch are at least in part the result of similar failures to face reality in the performance of his duties as governor.
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I thought I’d take the opportunity to predict a recession in the US triggered by fiscal spending shocks as mass layoffs and spending cuts hit the economy.
Myself and ChatGPT have been discussing this by looking at different percentage drops in deficit spending across the US government as soon as DOGE got started. Now, some US economists are predicting the same thing.
Having watched the current NZ government role out the equivalent playbook last year and deepen and lengthen an existing recession, the US is going to experience a huge spike in unemployment and a big drop in economic growth and stock prices. This could happen with 3 to 6 months – you heard it here first!
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Looking at the current profit reports and earnings expectations from large corporates in NZ I predict major restructuring in 2025 and significant private sector layoffs within the next 6 months – in addition to whatever’s been modelled already. This could lift un-employment above the expected peak of 5.4% and consequently I think growth will be much lower than expected. This forecast assumes another contractionary budget in May from Willis.
If further fiscal consolidation is needed to pay for more tax cuts the NZ economy could go back into a recession and stay there. It’s possible the NZ economy is close to a doom loop as domestic demand continues to be hit simultaneously by public and private sector contraction.
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Except that the Trumpian chaos is almost certain to substantially widen the US fiscal deficit (most of the stuff Musk is on about is small beer in the overall fiscal context, and the Republicans are committed to new and extended tax cuts). It wouldn’t greatly surprise me if the combination of tariff madness, chaotic govt more generally, and fiscal excess led the US into recession before long, but it is very unlikely to be because of fiscal consolidation.
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Thanks Michael. My concern is that the impact of fiscal spending movements in either direction are completely under-estimated and in NZ completely ignored at least when a certain direction is being adhered to.
To extend on that there is a belief among many, many economists across the world that a recession is a good and necessary thing and should be induced rather than avoided by the use of fiscal policy. This is what you might call a Darwinian lens – an economy should have a natural cycles like any eco system in nature.
This is an argument now being made in the US by some economic commentators – the recession is required to remove the economies dependence on 6% of GDP deficit spending by the government each year. This means allowing inflated asset prices to fall, it means allowing unemployment to rise significantly (in order de-fedaralise the labor market), it means allowing and even causing an economic contraction to ‘reset’ the economy.
Though the center right politicians or economists (maybe aside from Milei – he was fairly honest and up front about his plans actually so was Trump) might not like to say it out loud to their unemployed constituents it’s plausible that these recessions are not an accident or part of the normal business cycle but instead intentional, and considered necessary as part of a longer term economic ‘vision’ of making ‘space’ for private enterprise.
You could call it the long held dream of defanging the welfare state and terminating the dreadful legacy of FDR, the social contract and Keynesian economic policies.
Milei (Argentina) is the purest form of this – I think Trump and Musk will try and come in second and Reeves (UK) and Willis are both in contention for third.
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Many of the NZ corporates reporting losses and downgrades are luxury services like Sky Casino and Air New Zealand but Spark and Fletchers deliver communication and construction and they are going to reduce capacity in 2025 due to weaker demand. This is concerning – all of these large companies are going to cut headcount and also reduce investment in the NZ economy to ensure that they remain profitable and deliver for shareholders. This is what’s called the multiplier effect of fiscal spending – when Spark or Fletchers loses contracts with the government and their clients also lose contracts with the government – what happens?
They all stop spending their disposable income at Skey Casino is what happens.
Obviously, the impact of these larger companies cutting back will impact all the smaller business downstream from them. So layoffs could ripple out – again – across multiple sectors as 2025 progresses.
Debt holders and investors are not going to be unleashed as interest rates fall because their income and assets are now at risk in a weakening economy. Disposable income is saved and investors flee to safe government treasuries further removing needed spending and credit growth. And so the doom loop continues.
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Time to have a rerun of the Goon Show to help the medicine go down.
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New data from the US Census Bureau showed a big drop in consumer spending in January 2025, signalling a slowing economy. On top of that, Wall Street companies announced a big slew of layoffs, including Southwest, Chevron, and Meta. These signals suggest that US economy and housing market could be on the decline as 2025 progresses. Particularly in areas with a high employment of white-collar workers. Another concerning sign for the economy is a big drop in consumer sentiment, and continuing poor home sales activity, additional signs that the economy is slowing.
Mor details here – People have run out of money. Wall Street CEOs preparing for mass layoffs. https://www.youtube.com/watch?v=JSwI1BJlN2Q
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[…] probably should have been, when deliberately misleading Parliament has happened time and again, and just recently – and yet the Governor just disappeared with no notice on the eve of the big research […]
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Mark to market value of the loss to the public sector on account of the RB choices. So yes, private sector as a whole better off than otherwise. Difficult to tell who specifically is better off (often people who didn’t end up with the misfortune of holding NZGBs at the peak of the market)
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You did sort of note this but to me it just looks like Anglocentrism. Whatever the case, he should have known better. Be careful what you wish for I guess, we will see how the next governor measures up. Maybe it will be Grant Robertson!
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The Anglo story made a bit of sense in the “early to tighten” but not even that lens could make sense of the “early to ease” claim.
But, as you say, who knows what/who will come next.
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[…] low here, there wasn’t any sign of attempts to actively mislead or lie to the committee (Orr, just three months ago in only the most recent […]
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