Once upon a time the Reserve Bank’s monetary policy was guided by a Policy Targets Agreement reached between the Governor and the Minister of Finance. These days things are different. As one of the more sensible aspects of the 2018 legislative overhaul, the new Monetary Policy Committee now works to a Remit (current one here) determined ultimately solely by the Minister of Finance. That is the way things should be: if officials are free to implement policy, the policy goals should be set by those whom we elect, in this case the Minister of Finance. At times, the Minister may put daft things in the Remit – as the current one did a couple of years back with the house price references – but that is how our system of government works (as it should).
Another sensible aspect of those reforms was a requirement that every five years or so the Reserve Bank should provide advice to the Minister on the form and content of the Remit, and that the Bank should have to undertake public consultation in bringing together that advice. These provisions seem to have been quite influenced by the Canadian model, with the very big difference being that the Bank of Canada has typically generated a large volume of research in support of each quinquennial review whereas for the first review – underway at present – the Reserve Bank of New Zealand has generated none. That is, sadly, consistent with the dramatic decline in the research output, whether on monetary policy or financial stability functions, of the Orr-led Reserve Bank.
There have been two rounds of consultation. I wrote up and included a link to my submission on the first round here. The second stage of consultation invited submissions by today (although an email from the Bank today says that if you feel inclined they would be happy to receive submissions even on Monday).
It is January and I haven’t been particularly motivated to write about monetary policy. But I do approve in principle of the process of consultation on the Remit – and can only hope that future Governors make a more substantive and research-led fist of it – so thought I should probably make a submission on the second stage. It seems likely that neither the Governor nor the Minister are seeking any very material changes, but there are some longer term issues that need addressing – including dealing structurally with the near-zero effective lower bound on nominal interest rates – and there may be more scope for change on issues around the MPC Charter (which deals with MPC decision-making and communications), on which the Bank was also seeking views. So I got up this morning and spent a couple of hours on a fairly short submission. The full text is here
The first section has nothing that should be terribly controversial
A longer-term concern of mine has been the failure of central banks, here and abroad, to deal effectively with the lower bound, itself existing only because of passive choices by successive generations of governments and central banks. It would be unwise to lower the inflation target without fixing the lower bound issue, but if that constraint was removed there would be little or no good reason not to return to a target centred closer to true zero CPI inflation
The consultation document addresses the question as to whether there should be text in the Remit around the governance of alternative policy instruments (like the – expensive and ineffective – LSAP). The Bank prefers not, but I reckon there is a pretty strong case, although the issue is complicated by the divided responsibilitities between the Bank’s Board – who know nothing about monetary policy – and the MPC. There is no easy solution, but the Remit is supposed to be the focal document for guiding monetary policy accountability.
On the composition and strcuture of the MPC there are several significant matters that can only be dealt with by amending legislation (I hope National is open to making some fixes) but I took the opportunity to lament again the blackball the Governor, Board and Minister have in place preventing anyone with current expertise in monetary policy or macroeconomic research/analysis from serving as an external MPC member, a decision that among other things cements the Governor’s continued dominance of the system (the Governor himself having only limited depth and authoritative expertise in such matters). But my main comments were about matters that are directly dealt with in the Charter and in the culture that has developed around the operation of the MPC since it was established.
If you felt inclined to make a late submission, the relevant email address is remit-review@rbnz.govt.nz
Quite a bit later than almost all other advanced countries we finally got an update on December quarter inflation yesterday. Even then, our quarterly CPI is mostly a measure of the change from mid-August to mid-November, while almost all other OECD countries have data for the month of December.
From the government we heard more of the same old spin, about how low New Zealand’s inflation is relative to that in other countries. At a headline CPI level there is, of course, some truth to that, but (a) we have an independent (of other countries) monetary policy to ensure that we can control our own inflation rate, and (b) New Zealand, mercifully, has not faced the gas price shock most of the European countries have. I presume not even the government is claiming credit for that – it is almost entirely just good luck, a rare advantage of our extreme remoteness.
For international comparisons across a wide range of countries that focus on the inflation central banks and governments can sensibly be held accountable for, really the only available data are for the respective CPIs ex food and energy. It isn’t a perfect measure by any means – and differences in the ways countries put together their CPIs, notably the treatment of housing, also matter – but it is what we have. Here are the latest annual CPI ex food and energy inflation rates for the OECD countries (euro-area shown as a single number, reflecting the single monetary policy). (The OECD has not yet updated their table for yesterday’s Australian CPI, so I use here the very similar RBA series CPI ex volatile items (ie fruit and vegetables and motor fuel).
New Zealand and Australia are both at 6.7 per cent, just a touch above the median country. But note that if there are countries that have done worse than us, all the main advanced countries or country groupings (Japan, euro-area, Canada, UK, US – something close to the G7) are now less bad. Most haven’t done very well – 5 per cent core inflation is nothing to be complacent about or comfortable with – but less bad than us, or more specifically our central bank.
On a quarterly basis, the New Zealand exclusion measures of core inflation also don’t look particularly good – the latest annualised rates are around 8 per cent.
Once one gets away from international comparisons, it is often better to focus on the so-called analytical measures of core inflation. In New Zealand’s case these still aren’t ideal as (unlike the ABS) SNZ does not report these on a seasonally adjusted basis, but eyeballing the series seasonality does not appear to be particularly strong.
These measures either exclude or de-emphasise particularly large price changes and try to get to something more like a central tendency (the Reserve Bank’s sectoral core inflation series also aims to do something like this, but it uses annual data only and is prone to big revisions when the inflation rate is moving around a lot).
This chart seems to me the most favourable story one can currently tell about New Zealand inflation. There is an unusually large gap between the rates of increase in the two series – which should be a little troubling – but both series suggest that the peak has passed, that quarterly inflation was at its worst in perhaps the March quarter of last year (by when the OCR was still below pre-Covid levels). Given that the unemployment rate stayed at/near record lows all last year – and on all forecasts is expected to increase from here – one could take a reasonable amount of comfort from this chart. (Core) inflation should never have been allowed to get away – that it was is a generational failure by the new MPC – and is still, in annualised terms, a long way from 2 per cent, but things seem to be heading in the right direction.
One of the wild cards in the entire story is the price of air travel, and particularly international air travel (the latter currently 83 per cent more expensive than just prior to Covid)
You would have to suppose that in time (real) prices will fall back, and it is in some sense a Covid phenomenon. On the other hand, it is also a classic case at present where excess demand (relative to available capacity) is an issue, and excess demand often shows up more in some places than others (a few quarters back it was domestic construction costs that were increasing at annualised rates of around 20 per cent). High air travel prices aren’t now a direct consequence of current government interventions – and the New Zealand government is actually still in the last few months of subsidising international air freight capacity, having kept air travel capacity higher than otherwise. But you wouldn’t want central bankers aggressively targeting a measure that currently gives a significant weight to air transport prices.
For now, things look to be moving in the right direction in New Zealand. They would need to be, after such a signal policy failure. The forward indicators are for much weaker economic growth quite soon which, all else equal, will continue to pull the inflation rate back towards target – although the question forecasters will need to grapple with is “how rapidly?”. The coming suite of labour market data will be the next piece in the New Zealand puzzle.
Whether or not things are yet on track in New Zealand, this is one of those times when one would much rather be sitting in the New Zealand central bank than at the RBA. Here are the analytical measures of quarterly core inflation for Australia
Not only are they now higher than those for New Zealand, but there is no sign they have necessarily yet peaked. It is perhaps not too surprising when the RBA was so late to start raising the policy rate – against a very similar Covid and economic backdrop to New Zealand (and a stronger terms of trade).
For just over six months now I’ve been on the trail of questionable appointments to the new Reserve Bank Board. Most of the Board members aren’t really fit for office in anything other than ornamental roles – this in the midst of the worst monetary policy failure in decades and the Board being responsible for key appointments and for holding the MPC to account. But my main focus has been on the appointment last October of Rodger Finlay, while he was chair of the majority owner of Kiwibank, with a lesser focus on Byron Pepper, appointed in June this year while also serving as a a director of an insurance company operating in New Zealand (the largest shareholder in which was another insurance company subject to prudential regulation by the Reserve Bank.
The Reserve Bank has spent months trying to avoid/delay answering questions about these appointments. For any first time readers, the appointments themselves are made formally by the Minister of Finance, but materials previously released make it clear that the Reserve Bank (and The Treasury) were actively involved in the selection and evaluation of candidates for Board positions (as is quite customary).
A few weeks ago, the Bank gave me Hobson’s choice. Either face the likelihood of them declining the entire OIA request I had had with them (with the chance that one day, a year or two hence, the Ombudsman might make them give me more) or accept something of a black-box offer.
I took the offer. Yesterday I received their response.
As I will lay out, there is some interesting material included, but as I had half-expected it is a pretty cagey and dishonest effort, since it includes nothing at all about how conflicts of interests had or had not been handled in the selection, interview, and evaluation process prior to the appointments being made.
Taking Pepper first, the documented provided is a four page letter dated 27 July 2022 (a month after Pepper’s appointment had been announced) to Pepper from Neil Quigley, the chair of the Board. In that letter, which addresses advice from both internal and external legal counsel, Quigley acknowledge that Pepper himself had been entirely upfront
I acknowledge that you have pro-active and transparent in declaring the above interests in each of your pre-appointment discussions with RBNZ board members and senior executives of The Treasury, and that you subsequently confirmed these in your pre-appointment interests disclosure to RBNZ staff.
But…
The RBNZ is …. under constant scrutiny from both its regulated institutions, market participants and interested members of the public as a whole. The RBNZ is also subject to the Official Information Act, and more generally as a public institution has an obligation to respond in good faith, and within the limits of privacy and commercial sensitivity, provide good faith responses to questions and enquiries received. As a result, the RBNZ needs to set the highest standards, and take appropriately conservative approaches to the management of interests and the avoidance of both actual and perceived conflicts of interest, as both Mr McBride and Mr Wallis point out in their advice to me. This also means that the RBNZ needs to avoid complexity and opaqueness in managing in the interests of Board members, because these are challenging to explain to journalists and to the public.
and “the legal position will not stop interested members of the public from asking us how we manage the situation”.
Quigley (no doubt here also by this time reflecting the stance of the Governor) writes
Pepper then chose to give up the insurance company directorship (he could presumably instead have resigned the Reserve Bank directorship).
A few quick points:
one might have some sympathy with Pepper himself. He appears to have hidden nothing, and the Reserve Bank Board role was the first government appointment he appears to have received. A really strong ethical perspective should probably have had him recognising from the start that it was going to be a dreadful look to be both an insurance regulator (director thereof) and director of an insurance company operating in New Zealand (even one not directly regulated by the Bank), but (a) he’d been open, and (b) had got through the recruitments consultants the government was using, discussions with senior RB and Treasury figures, and Cabinet.
did Neil Quigley (and Orr and the rest) not appreciate previously that appointees to the new, much more powerful, Reserve Bank Board were going to receive scrutiny, and that actual, potential or perceived conflicts of interest would inevitably be a major focus for a Board responsible for prudential regulatory policy across banking, non-bank deposit-taking, payments systems, and insurance? If not, why not?
even at the late date of the letter, Quigley seems to regard the problem as being as much the OIA rather than the importance of appointments to powerful regulatory agency bodies being above reproach or ethical question. In fact, it is blindingly clear that Quigley, Orr and the rest of them approached Board appointments only with the narrowest legal constraints in mind. If, as the law was written, the Pepper (or Finlay) appointments were not illegal (and they weren’t) there could be no problem. Astonishingly, in both cases The Treasury – much more experienced in making and advising on government board appointments generally – seems to have gone along (as did the Minister of Finance and his colleagues). It is a poor reflection on all involved.
And that is all I want to say about Pepper. In the end, the right thing seems to have been done, but only after public and media scrutiny and criticism. Recall that a few years ago Orr got on his high horse about “culture and conduct” in the financial sector: we really should have been able to expect a much higher pro-active standard around key appointments than was evident here, and as so often concerns brought to light on the things we the public get to see leave one wondering about the standards the Bank and Board chair apply in areas we don’t easily get to see.
What of the Finlay issues?
What has been released (link above) is a three-page summary, apparently prepared by the Bank’s in-house lawyer summarising various selected bits of correspondence relevant to the handling of Finlay’s conflicts of interest but only from the time his appointment to the Reserve Bank Board, from 1 July 2022, was announced in October 2021 (plus some editorial spin intended to try to shape the interpretation drawn by readers). Between those two dates Finlay was paid to serve on the “transition board” handling the establishment of the new governance regime, but previous OIAs have disclosed that he also routinely attended meetings of the then-official Reserve Bank Board during this period. My OIA request had explicitly covered a period starting on 1 April 2021, shortly before the public advertisements had appeared for positions on the new Reserve Bank Board, and it is telling that the Bank has chosen to release nothing from the selection and evaluation period.
Were this Reserve Bank document to be the only material we had, it might appear that everyone had acted honourably and appropriately in a slightly difficult time (what with secret discussions around the future ownership of Kiwibank going on in the background that very few people – Treasury, Bank or even Ministers – could reasonably be made aware of).
Thus
on 18 October 2021 we are told that Rodger Finlay “had outlined all interests that might potentially be relevant. In particular, he declared interest [in] (as a director of) NZ Post and Ngai Tahu holdings.” (this latter, which I have not focused on relates to the substantial – but not controlling – stake Ngai Tahu was taking in an insurance company that is subject to Reserve Bank prudential supervision)
on 20 October, the Governor asked about commitments Finlay had made about “management of conflicts of interest”, with Quigley weighing in that the Bank needed to “remain conservative on this front and maintain a very low risk appetite, particularly regarding Kiwibank”
on 17 November, a couple of senior Bank staff met Finlay who “outlined how particular interests could be eliminated before 1 July 2022 [presumably a first reference to the prospect of changed Kiwibank ownership] and how any COIs that could not be eliminated could be managed post 1 July 2022”
on 23 November, the Governor noted that “Kiwibank’s ownership structure would be resolved by July 2022….The Governor sought more information on how any conflicts through Ngai Tahu Holdings could be managed”. Quigley responded “noting that it is important to avoid or resolve perceived COIs as it is to avoid or resolve actual COIs”, noting that he would discuss the Nagi Tahu situation further with Finlay, but “expected NZ Post will resolve itself by July 2022”.
on 17 March 2022, Finlay emailed the chair and Governor indicating he had been advised that NZ Post’s divestment from Kiwibank would be complete before 1 July 2022, and that he was no longer chair of the Ngai Tahu Holdings Audit Committee.
In the editorial at the end of the document this appears
(That final paragraph is not very satisfactory, since my OIA request had been explicitly about conflicts of interest generally, and not just the Kiwibank case, although it is slightly encouraging that the Bank has at least been cognisant of the conflict, even if it is not dealt with at all adequately by the restriction mentioned, since it seems Finlay is free to participate in discussions and votes on policy matters that affect a regulated company he has a significant interest in, as director of a significant shareholder.)
All that might sound fairly exculpatory for the Bank (perhaps especially Quigley, who seems to have been more concerned than management) and for Finlay – all honourable people acting in an honourable and above-board way, and all that.
Except that (a) not only does none of this cover the period before Finlay was appointed, but (b) what little the Bank released is far from all we now know about what went on. I’ve written various posts on various material Treasury and the Minister of Finance have released. Of particular interest is the “incident report” prepared over the signature of Treasury deputy secretary Leilani Frew. You will recall that the Secretary to the Treasury had had to apologise in writing to the Minister of Finance in late June for the failure of Treasury staff to ensure that Finlay’s conflicts re Kiwibank were disclosed in key papers to the Minister and to Cabinet. The “incident report“, which I wrote about here, had been requested by the Secretary, to identify what went wrong and what lessons there were for the future. Since it wasn’t written for publication, and The Treasury had by this time already owned up to an error, and since it covers the full period, it should be treated as a much more reliable and complete account than what the Bank has now selectively released.
Of direct relevance
Conflicts of interest were closely considered throughout this process. G & A Manager Gael Webster sought statement of conflict protocols from the Chair of the RB board, set up the process for the appointment of Transition board members and the new board, and contracted Kerridge & Partners to run the recruitment process, initially for the Transition board.
Kerridge met with the Treasury and RB Governor where conflicts were discussed, and Kerridge was provided with the Bank’s conflict protocols.
We also already knew, and the incident report confirms, that Finlay himself disclosed no possible conflicts to the consultants or the interview panel (not Kiwibank, not Ngai Tahu).
The report goes on
The due diligence interview with Mr Finlay proceeded with a panel comprising Sir Brian Roche as chair, Neil Quigley and Tania Simpson from the current RB board, Caralee McLeish, Wayne Byres (chair of the Australian Prudential Regulation Authority), and Murray Costello. The panel knew that Mr Finlay was chair of NZ Post which owned a majority share in Kiwi Group Holdings Ltd, which in turn owned Kiwibank, which is subject to regulation by the RB.
Sir Brian recalls conflicts being discussed but it was considered Mr Finlay was not conflicted. The RB’s Conflict of Interest policy stated that Mr Finlay would have a conflict that should be declared if he was a director of Kiwi Group Holdings Ltd, or a director of its subsidiary banking company Kiwibank Ltd. Neither of those situations existed and Mr Finlay is completely removed from the governance and operations of Kiwibank.
This reflects poorly on every single one of these people. There is no sign any of them were yet aware of the Ngai Tahu issue (which, see above, the Bank itself now appears to regard as a real conflict) but as regards Kiwibank they seem to have been driven by a narrow and legalistic interpretation – that can only have come from the Reserve bank side – that whatever was not illegal was therefore entirely proper and unproblematic).
Now, quite possibly – we don’t know – discussions around the future ownership of Kiwibank were already underway by mid last year (when the interview and evaluation were going on), but we know that The Treasury staff dealing with this appointment were not aware of that project until March/April this year, it seems unlikely the matter would have been disclosed to a foreign regulator (Byres, Kiwibank having no Australian presence), there is no sign Roche was aware (or surely he would have mentioned it as a consideration when asked in June/July 2022 by people who themselves were now aware), and even if Quigley was aware there is no obvious reason Simpson should have been advised (the old RB Board being purely advisory on policy matters). It seems quite safe to conclude that judgements – in which the Reserve Bank shared – about Finlay’s acceptability for the Reserve Bank Board role were made in the expectation that he would continue to be NZ Post chair and that NZ Post would continue to own the majority of Kiwibank. And it is just inconceivable how they – and especially the RB people, who should have been most concerned with, and conscious of, appearance risk – thought it was okay.
(In the material the Bank released there is an attempt to minimise Finlay’s role at Post and Post’s role re Kiwibank, but none of it changes the fundamental fact that Reserve Bank policy decisions would potentially severely affect the operations and fortunes of an entity NZ Post, chaired by Finlay, majority owned.)
The “we all knew what we were doing and there was never going to be a problem because the Kiwibank ownership would be resolved before 1 July 2022” line just does not wash. A much more compelling story is that all involved were running with narrow legalistic interpretations – it was lawful, therefore just fine – and had lost any sense of the big picture around integrity and appearances of integrity. For some reasons – not really clear, although I’ve heard suggestions they are similar personalities – Orr wanted Finlay and nothing was going to stand in the way.
The story the Bank now spins about how “we were all doing the right thing but just couldn’t write it down, even in Cabinet papers” doesn’t stack up for a moment:
it is entirely inconsistent with the fact of the Secretary to the Treasury’s written apology
it is inconsistent with the account of that interview panel (and of Finlay’s non-disclosure of any conflicts)
it is inconsistent with the twin facts that (a) the Minister of Finance had to consult with Opposition parties on the appointment and b) that the appointment was disclosed on the RB website by the end of 2021 (even if no one much noticed then). Had the true story really been “oh, we’ll have changed the ownership of Kiwibank by 30/6/22 so that NZ Post won’t own it by then” the commerical-in-confidence story would have prevented them giving an honest answer to any Opposition party that had been on the ball and asked about apparent conflicts, or the people like me and the journalists who wrote about the issue if we had picked it up earlier.Â
there is no sign in any of the papers released of the Bank raising any concerns late in the piece as it became clear that the Kiwibank ownership situation would not be sorted out by 30 June 2022 (no sign eg of them urging the Minister to get Finlay to take leave of absence from the RB Board until it was sorted out). All the signs are that they just did not care very much, if at all. It wasn’t unlawful, and if it wasn’t ideal it was still okay. If there is evidence that this is not the correct interpretation they could readily have released it.
No, the decision to appoint Finlay back in October 2021 was clearly taken on the narrow basis that the law did not prevent Finlay being appointed even if he chaired the majority owner of Kiwibank. And that reflects very poorly on everyone involved – Orr, Quigley, Byres, Treasury and the Minister of Finance (and his colleagues).  It would not have happened in any moderately well-governed country, but it happened here, made worse by the refusal of the Reserve Bank (Governor and chair) to take any responsibility for an egregious misjudgment, the sort of defensiveness that feeds the slow corruption of the state.
Suppose that Finlay was really appeared like a potential star catch as a potential Reserve Bank Board member (not clear why he might but just suppose). Suppose too that you (Governor, Minister, Board chair, Secretary to the Treasury) knew that negotiations were getting underway to get Kiwibank out from under NZ Post, and you thought those would be likely to be sorted out by mid 2022. It would have been easy enough, and entirely proper, to have made an in-principle decision to appoint Finlay but to delay any consultation with the Opposition and any announcement until the conflict – real and substantial – was removed. Perhaps that might have meant Finlay taking up his appointment at the Reserve Bank on 1 September rather than 1 July, and his services – just another professional company director (as Treasury notes in that report “there were other candidates the Minister could have considered for the Reserve Bank”) – wouldn’t have been available to the Governor during the transition period. It would have been a perfectly right and proper thing to have done. But Orr – and apparently Quigley, MacLeish, and Robertson – just didn’t care. In Orr’s case, still doesn’t it seems. As so often with him, responsibility, contrition, and doing the honourable thing (doing, and being seen to do) count for little or nothing. There are no standards, just the bare minimum of (inadequate) legal restrictions, and whatever he can get away with.
UPDATE 23/12: The Bank has chosen very consciously to play silly games and to deliberately not provide any material re Finlay for the period prior to mid-October 2021, the period in which the selection, evaluation, assessment and recommendations to the Minister of potential candidates was taking place. It is clearly the period they don’t want light shed on, and as would have been very clear from my earlier writings it was a period of considerable interest to me (and was explicitly covered in my original requests). Accordingly, I have lodged a new request with the Bank for all material relevant to the selection, evaluation etc of Finlay and Pepper, for the periods up to mid-October 2021 in Finlay’s case and up to 30 June 2022 in Pepper’s case. Â
For those interested in reading further, Jenee Tibshraeny had an article in the Herald this morning prompted by the OIA material in this post. including a brief and unconvincing comment from Finlay (the first we’ve heard from him I think).
In a couple of weeks it will be 2023. And then in a couple of years it will be 2025.
Those with longish geeky memories may recall that there was once talk of closing the gap between New Zealand and Australian incomes/productivity by 2025. Without any great enthusiasm no doubt, the incoming National government led by John Key agreed to ACT’s request for a (time and resource-limited) official 2025 Taskforce that would offer some analysis and advice on what it would take to achieve such a goal. The Taskforce’s first report had been dismissed by the Prime Minister before it was even released and after the second report the Taskforce was quietly disbanded. I held the pen on the first report and had some input on the second one (itself written by the current chair of the Reserve Bank Board), and since the reports were written when my kids were very young and I still held some vague hope that they might grow up into a first world country that goal of catching Australia has stayed with me, as has the disillusionment with our political and bureaucratic classes who, no doubt comfortable themselves, seem to have lost all interest. It need hardly be repeated – I’ve made the point often enough – that, despite all its mineral riches, Australia is not a stellar productivity performer, so aiming to catch them was hardly reaching for the stars.
My preferred summary metric for such comparisons is real GDP per hour worked. It isn’t the only meaningful national accounts measure but (for example) it isn’t thrown around by the vagaries of commodity price (terms of trade) fluctuations which, especially in economies like ours, are exogenous variables our governments can’t do a lot about. In 2007, just prior to the last recession, OECD estimates have Australian real GDP per hour worked about 23 per cent higher than that in New Zealand.
What has happened since? On that same (annual) OECD metric the gap last year was about 31 per cent.
The ABS produces an official quarterly series of real GDP per hour worked. SNZ does not, but it does publish two measures of real GDP (production and expenditure) and both the HLFS hours worked series and the QES hours paid series. Over time the various possible New Zealand productivity growth measures tend to converge (as they should), but at any point in time the estimates for the most recent few years can and often do diverge quite substantially. Here is a chart with the most recent data.
Covid has probably only compounded the situation, both because measuring what actually happened to GDP over the disrupted last three years is more than usually challenging and because hours worked and hours paid series will have diverged in ways that make sense but hadn’t really been anticipated. In doing charts like this I used to simply work on the basis that the two were just roughly the same thing, each measured noisily and so averages would usually be the least bad way to go. But then governments compelled people to stay at home (often not able to work) and yet funded employers to enable them to be paid. Hours paid held up in lockdowns even as hours worked fell away. More recently of course there is a lot more sickness than usual – for much of which people will have been paid, but may not have worked.
I still don’t have any particular reason to favour one GDP measure over the other, but the HLFS hours actually worked (self-reported) seems a better denominator for labour productivity estimates at present. Here is that line, together with the official Australian series.
And here is the same chart just for the Covid period
The New Zealand series is much more volatile, but count me a bit sceptical for both countries. Go back one chart and it looks as if productivity growth in both countries has been faster during the Covid period than in the previous half-dozen years, and that doesn’t make a lot of sense. There are plenty of puzzles about how the economy has performed over the last three years – starting with what everyone missed and got wrong on inflation – but if “true” labour productivity growth really accelerated over the Covid period that should spark a lot of future research papers.
I remember back in 2020 people suggesting that (eg) that lift in reported productivity in Australia in June 2020 might have been because (eg) the shock to tourism saw a lot of very low wage workers not working, so simply averaging up productivity for the rest. But a couple of years on both countries have very high labour force participation rates and very low unemployment rates (relative to history Australia even more so than New Zealand). And we’ve had huge (probably largely inevitable) policy and virus uncertainty, and it isn’t many years since economics commentary used to full of talk of the damage that increased (policy) uncertainty would cause. And when supply chains have been disrupted, and people haven’t been able to foster face-to-face connections globally, it isn’t usually a climate considered most conducive to productivity growth. It isn’t as if productivity growth in these estimates has been stellar, but it is a bit puzzling. Perhaps where we are now the numbers are just flattered by overheated economies. Perhaps it will all end revised a way anyway, but for now at least (a) both countries have had a bit more productivity growth in the data that might have been expected, and (b) over the Covid period, the gap between New Zealand and Australia does not appear to have gotten any wider.
As I noted earlier, for commodity exporting countries, fluctuations in the terms of trade are largely exogenous. But, unfortunately for New Zealanders, whether one starts one’s comparison 15 years ago just before the last big recession or focuses just on the last couple of years, Australia’s terms of trade has performed better than New Zealand’s.
Indications from the Australian government that it is going to make it easier for New Zealanders to move to Australia is great for young New Zealanders, opening up higher income opportunities that have been harder to access in recent years. It isn’t so good for a community of people who choose to dwell in these islands. But there is no sign either main political party actually cares enough to think hard about overhauling policy here in a way that might one day mean New Zealand might offer the world-matching living standards it did not that many decades ago.
At last year’s Annual Review hearing at the Finance and Expenditure Committee the Reserve Bank Governor was shown to have misled (presumably deliberately) Parliament twice. Last month he was at it again with the preposterous claim to FEC that the Bank would have to have been able to forecast back in 2020 the Ukraine invasion for inflation now to have been in the target range. It was just made up – quite probably on the spur of the moment – and of course they’ve never produced any later analysis to support the claim (despite an MPS and the five-yearly review of monetary policy in the following weeks).
On Wednesday afternoon the Bank was back for this year’s Annual Review hearing. It was the last day of term for Parliament, and there was quite a feel to it in the rather desultory scatter-gun approach to the questioning from the Opposition. You wouldn’t know that the two Opposition parties had just openly objected to the Governor’s reappointment to a new five year term.
But MPs – and the viewing public – were still subject to more of Orr being anything other than straightforward, open, and accountable. More spin, usually irrelevant and sometimes simply dishonest.
The meeting opened with Orr apologising that the Board chairman was absent. Apparently he had some function to attend in his fulltime executive job, but you might have thought that when you were the chair of the Board through a year when inflation went so badly off the rails, and still chair now when the Bank is averring that a recession will be needed to get things back under control, you might have made it a priority to turn up for Parliament’s annual scrutiny of the Bank’s performance. And if your day job commitment was really that pressing you might have sent along a deputy. Whether prior to 1 July (the year actually under review) or since the Board was explicitly charged with holding the Governor and MPC to account. and the Board controls all the nominations for (re)appointments. The Board was, after all, complicit in barring people with actual relevant expertise from serving as external MPC members.
No doubt the failure of anyone from the Board to show up just speaks to how – whatever it says on paper – the Bank is still a totally management (Orr) dominated place.
Then there was Orr’s transparent attempt to talk out the clock, reducing available question time with a long opening statement (with not even a hint of contrition over the Bank’s monetary policy failures). Mercifully, the committee chair eventually told him to cut it short.
If the Opposition’s questioning was never very focused or sustained, to his credit National’s Andrew Bayly did attempt a question about the appointment of Rodger Finlay – then chair of NZ Post, majority owner of Kiwibank, subject to Reserve Bank prudential regulation – to the “transition board” as part of the move to the new governance model from 1 July this year. As regular readers will know, the Reserve Bank has been doing everything possible to avoid giving straight answers on the Finlay matter, and Orr was at it again on Wednesday. First, he attempted to deflect responsibility to the Minister of Finance as the person who finally makes Board appointments (even though documents the Minister and The Treasury have already released make it clear that management and the previous Board were actively involved in the selection of people to recommend for the new Board) and then he fell back on the twin claim that there was no conflict of interest as regards the “transition board” (which had no formal powers) and that if there were any conflicts they had been removed by the time Finlay was on the Board itself.
There was no follow-up from Bayly, who could and should have made the point that when Finlay was appointed to the “transition board”, in October 2021, he was also appointed to the full Reserve Bank Board from 1 July 2022, and at that time – indeed right up to mid-June this year when Cabinet was considering his reappointment to the NZ Post role – there had been no suggestion that Finlay would not remain in his NZ Post role while serving on the Reserve Bank Board which would be directly responsible for prudential regulation. Indeed, documents already released reveal that the Bank had told The Treasury and the Minister that they had no concerns about this. It was an egregious appointment, inconceivable in any well-governed country, and yet the Opposition did not pursue the matter and the Governor – the one who likes to boast of his “open and transparent” institution – makes no effort to honestly account for his part in this highly dubious appointment.
If Orr was put under no pressure on the Finlay matter, on monetary policy and related issues he had a clear field. There were no questions at all – nothing for example about the Annual Report (the basis for the hearing) in which climate change featured dozens of times and the inflation outcomes – well outside the target range, on core metrics – got hardly any attention. No suggestion that a simple apology from the Governor and MPC might be in order – not one of those faux ones regretting the shocks the New Zealand economy was now exposed to. It was after all these people who voluntarily took on the role (and pay and prestige) of macro stabilisation and, on this occasion and perhaps with the best will in the world, failed. Just nothing.
And so the field was left to Orr. In his opening remarks we had this
Which is just spin. He seems to want to claim credit for New Zealand’s low unemployment rate even though (a) as he often and rightly points out the Reserve Bank has no influence on the average rate of unemployment or the NAIRU (which are functions of structural policy), and (b) the extremely overheated labour market and unsustainably low unemployment rate are a big part of our current excessively high core inflation problem. In the end, aggregate excess demand is the fault of the Reserve Bank. not something they should be claiming as a “good thing”, let alone seeking credit for. (In their better moments – eg the MPS – they know this, talking about the labour market being unsustainably overheated, but then Orr’s spin inclinations take hold). At the peaks of booms, unemployment is always cyclically low (or very low). But often what matters is what needs to be done to get inflation back in check.
And what about that claim on inflation? Well, if he wants to simply say the New Zealand is fortunate not to be integrated to the global gas and LNG market that is fine, but it is a complete distraction from a central bank that is responsible primarily for core inflation in New Zealand. On core inflation – in this case, because it is available and comparable, CPI inflation ex food and energy – for the year to September (latest NZ data) we are no better than the middle of the pack.
An honest central bank Governor, committed to serious scrutiny, might better say that we are in a quite unfortunate situation, for which the Reserve Bank itself has to take much of the responsibility. Instead we get more spin
“Even with the expected slowdown in the period ahead, it is anticipated that the level of employment will remain high.”
which is no doubt true, but the Bank’s own forecast is for a sharp rise in the rate of unemployment.
But Orr is more in the realm of minimising (his) responsibility. In recent months we’ve had the absurd and unsupported claim that without the war inflation would have been in the target range. We’ve also had the suggestion – heard a couple of times from his chief economist – that perhaps half the inflation is overseas-sourced. This claim also appears to be undocumented, and simply doesn’t stack up: core inflation is the Bank’s responsibility, the New Zealand domestic economy is badly overheated, and the whole point of floating the exchange rate decades ago was so that even if other countries had increases in their core inflation rates, New Zealand did not need to suffer that inflation. We had our own independent monetary policy, and a central bank responsible for New Zealand core inflation outcomes.
To FEC, Orr ran this claim
It is certainly true that if the Bank had begun to raise the OCR a little earlier in 2021, it would not have made that much difference to inflation (core or headline) now. 25 basis points in each of May and July 2021 might together have lowered headline inflation by September 2022 by half a percent at most. But in this framing – also in their recent Review – there are two elements that are little better than dishonest. Purely with the benefit of hindsight (their own criterion) it is now clear that monetary policy should not have been eased at all in 2020, and that monetary policy should have been run much tighter over the period since then. Had that been done, core inflation would have stayed inside the target range. Now that might be an impossible standard, but that is simply to point out what I noted in my post on the Review was the major weakness: there was just no sign the Bank or MPC had devoted any serious thought or research to trying to understand what they (and everyone else) missed in 2020 and 2021. But they were responsible.
And then there is the continual effort to blame food and energy price shocks, in a way that simply flies in the face of the data. Headline inflation is the year to September was 7.2 per cent. Excluding food and energy, it was 6.2 per cent. 6.2 per cent is a long long way above the top of the Bank’s target rage – more than 4 percentage points above the target midpoint the Minister of Finace requires them to focus on.
And as I pointed out in a post debunking the “war is to blame” claim, core inflation was very high, the labour market well overheated, before the war.
Oh, and Orr was at it again with his claim – apparently intended as a defence – that
I’ve shown before that 7 OECD central banks (out of 20 or so) had started raising their policy interest rates before the Reserve Bank of New Zealand (Orr seems to want to claim credit for stopping the LSAP but (a) he has claimed that by 2021 it wasn’t having much effect anyway and b) the Funding for Lending programme carried on all the way to this month). And since each central bank is responsible for its own country’s (core) inflation, a simple ranking of who moved when reveals precisely nothing. As early as the end of 2020, only 8 OECD central banks were experiencing annual core inflation (ex food and energy) higher than New Zealand (quite a few with higher inflation targets than New Zealand, including chaotic Turkey). By mid 2021, there were only 7 central banks with higher core inflation than New Zealand (mostly the countries that began raising policy interest rates earlier than New Zealand). New Zealand’s core inflation then was already materially higher than that in Australia, Canada, the UK, and the euro area (but behind the US, and I find the Fed’s approach to monetary policy last year quite impossible to defend).
Overall it is hard to find any OECD central banks that have done a good job over the last couple of years (the central bank of Korea looks like one candidate for a fairly good rating). It is quite possible – current core inflation might suggest it – that the Reserve Bank of New Zealand has done no worse than average. But that isn’t ever the spin we get from the Governor, for whom responsibility let alone contrition seem like words from a foreign language for which no dictionary was available. No one is suggesting the last 3 years have been other than hard and challenging for central banks, but that is nothing to what they are proving for the people who have suffered – and will suffer over the next year or two – from their misjudgments, well-intentioned as they may well have been.
Orr’s behaviour has been given licence by the Minister of Finance – reappointing him despite his poor record on multiple counts. But it would have been nice if Parliament’s Finance and Expenditure Committee had ever shown a bit more vigour and focus in holding the feet of the Governor and his colleagues to the fire, instead of all wishing each other Merry Christmas and heading off for the holidays.
Just a few things caught my eye flicking through yesterday’s HYEFU summary tables – if you don’t count points like the fact that The Treasury projects we will have had five successive years of operating deficits (in a period of a high terms of trade and an overheated economy), and that net debt as a per cent of GDP (even excluding NZSF) is still increasing, notwithstanding the big inflation surprise the government has benefited (materially) from.
This chart captures one of the things that surprised me. It shows export volumes and real GDP, actual and Treasury projections. Exports dipped sharply over the Covid period (closed borders and all that), but even by the year to June 2027 Treasury does not expect export volumes to have returned either to the pre-Covid trend, or to the relationship with real GDP growth that had prevailed over the pre-Covid decade.
The Reserve Bank does not forecast as far ahead as the Treasury but has quarterly projections for these two variables out to the end of 2025. Here is a chart of their most recent projections
It is a quite dramatically different story.
The issue is here is not so much who is right – given the vagaries of medium-term macro forecasting there is a fair chance that none of those four lines will end up closely resembling reality – as that the government’s principal macroeconomic advisers (The Treasury) have such a gloomy view on the outward orientation of the New Zealand economy. One of the hallmarks of successful economies, and especially small ones, tends to be a growing number of firms footing it successfully in the world market. Earnings from abroad, after all, underpin over time our ability to consume what the rest of the world has to offer. Quite why The Treasury is that pessimistic isn’t clear from their documents – one could guess at various possibilities in aspects of government economic policy – but it does tend to stand rather at odds with the puffery and empty rhetoric the PM and Minister of Trade are given to.
Then there was this
On Treasury forecasts the CPI in 2025 will have been 13.3 per cent higher than if the Reserve Bank had simply done its core job and delivered inflation on average at 2 per cent per annum (the Reserve Bank’s own projections are very similar). It is a staggering policy failure – especially when you recall that the Governor used to insist that public inflation expectations were securely anchored at around 2 per cent. It is an entirely arbitrary redistribution of wealth that no one voted one, few seem to comment on, and no one seems to be held to account for, even though avoiding such arbitrary redistributions (benefiting the indebted at the expense of depositors and bondholders) was a core element of the Reserve Bank’s job. We don’t – and probably shouldn’t – run price level targets, but let’s not lose sight of what policy failures of this order actually mean to individuals.
And the third line that caught my eye was this
A good question for the National Party might be to ask how much of this 3.5 percentage point increase in tax/GDP they intend to reverse, and how, or would any new National government simply be content to leave little changed what Labour has bequeathed them?
As longer-term context (slightly different measure to get back to the 70s) the only similarly large increases in tax/GDP seem to have been under the 1972-75 and 1984-90 Labour governments.
It is sometimes hard to tell when Reserve Bank actions are concerted, when somewhat chaotic, and quite what mix applies in any particular case.
Earlier this week I wrote about MPC member Peter Harris’s “interview” – responses to an initial series of emailed questions – with Stuff’s Tom Pullar-Strecker. I assumed it was coordinated and managed by the Bank – though on reflection who could possibly have advised Harris to answer as he did – but it appears the trainwreck, which reflects poorly on both him and the institution, may have been almost all of his own doing.
And then there is the saga of Rodger Finlay, appointed last year as part of the Bank’s “transition board” and as a full Board mmbers from 1 July this year while he was – and intended to continue as – chair of the board of NZ Post, the majority owner of Kiwibank, an entity subject to the Reserve Bank’s prudential regulation and supervision. It was a staggering conflict of interest, almost inconceivable in any well-governed country, that the Reserve Bank itself (Governor and outgoing Board) seem to have had no problem with. Ever since I noticed this appointment in June, I have been trying to get to the bottom of what went on.
Both The Treasury and the Minister of Finance have answered OIA requests in a fairly timely, and apparently fairly open, way. Not so the Reserve Bank. The text below is from a post dated 27 October.
I replied to that apology thus
And I few days later I had this from the Bank, with specific suggestions – from them – on framing the request
I responded the next day
And within a couple of hours she responded
Note that “next couple of days” in the first paragraph.
I heard nothing more until Tuesday, which must have been almost the last of the 20 working days the Bank had to respond. Then I received an email from the same staffer advising me – no great surprise, and I wasn’t greatly bothered – that they were extending the request and giving themselves another 14 working days. But, as I noted to myself, at least I’d have results by Christmas.
Note that the reason given for the extension was “This is in accordance with section 15A(1)(b) of the OIA, where the consultations necessary to make a decision on the request are such that a proper response to the request cannot reasonably be made within the original time limit.”
But late the next day I had a lengthy letter from one Adrienne Martin, Manager Government and Industry Relations, and apparently Ruth’s boss, threatening to refuse my request altogether on the grounds that it would – she claimed – take an estimated 67 working days to respond to it, an estimate itself (she claimed) based on a narrower request than the one the Bank had suggested (see above), as refined (see above). After rehearsing the options open to the Bank she concluded thus
All of which has already bought the Governor 5 months of delay in getting any clarity on how he, his senior managers, and/or the old Board thought it could possibly have been appropriate to have appointed the chair of the majority owner of a registered bank, supervised by the Reserve Bank, to the board which would take full legal responsibility for all the Bank’s supervisory and regulatory functions.
I’m not yet sure how I will respond. I simply do not buy the “67 working day” line, and it is particularly incredible when they offer that they will provide a substantive summary of the relevant emails (presumably they don’t take the affected parties 67 working days to find, let alone summarise). Moreover, the Bank’s General Counsel has form as an aggressive and very motivated player, championing the Bank’s corner, and (more specifically) earlier releases suggest that he and his staff were themselves key participants in these discussions, so how much confidence should I have in the integrity of the process? I’m also not just interested in the “conflict of interest management” but how the Bank came to take the view that this conflict could ever be manageable (substantively and reputationally) when few/no other serious bank regulators would have.
On the other hand, the alternative may be ending up with nothing at all.
As a reminder, the Bank regularly claims it is very open and transparent. As I have pointed out for years – predating Orr – they tend to be fairly transparent about things that advance their interests (who isn’t?) but not otherwise, and real transparency and accountability encompasses both. The Bank falls a long way short and this is just the latest example. Serious questions have been raised about the Bank’s involvement with a major public appointment. An open and transparent central bank, once serious questions were being raised, would have been pro-active in identifying and releasing all the relevant papers, making a public statement, and perhaps opening themselves up for serious questioning.
But this is the Orr/Quigley Reserve Bank.
The public deserves better.
UPDATE (5/12): I gave up, and sent this response this morning
Over the last couple of years I’ve commented at various times on (a) the loss of experienced research staff (b) the rapid turnover of senior managers, and (c) the bloated number of (very highly paid) new senior managers at the Reserve Bank.
I haven’t paid overly much attention to the overall staff turnover data. And it turns out that was probably just as well.
Here is a chart of annual staff turnover rates for the Bank this century. There has been a sharp increase in the last year (to June 2022).
But Simon Chapple, at Victoria University’s Institute for Governance and Policy Studies, went to the effort of digging out the same data for the Bank and a bunch of other public sector agencies, and kindly sent me a copy of his spreadsheet.
Of all the other public sector agencies, perhaps the best comparator is The Treasury. They are very different agencies but have often been bracketed together.
There is a lot more variability in the Treasury series, but (a) it has been higher or no lower than the Bank every year this century, and (b) over the last year has had an absolutely staggering 36.5 per cent turnover rate. It was bringing to mind the stories from 35 years ago when at one point (and if I recall correctly) the median length of service at The Treasury was under two years.
Here is the data for three other agencies: the (public service) Department of Prime Minister and Cabinet, the Public Service Commission (previously SSC), and Statistics New Zealand.
I suspect the DPMC figures can be discounted, as DPMC built up a huge temporary operation to co-ordinate the Covid response (including lots of comms staff for all those adverts), but in the most recent year even SNZ had slightly higher staff turnover than the Reserve Bank. (For the public service as a whole – not shown – the staff turnover rate was exactly the same as at the Reserve Bank.)
Over the last year or so, presumably two – mutually reinforcing – influences have been at work. First, the economy has been materially overheated reflected, among other places, in an extremely tight labour market. When the opportunities are good and finding new jobs is easy a given person is more likely to move in any particular year. And the second is the rather arbitrary block on wage increases for many public servants. All else equal, not only has that made moving to the private sector relatively more attractive – private sector wage increases have run well ahead of public sector ones – but has also created the readily-visible bizarre incentive that the only way many public servants can get a pay rise is to change jobs (whether to other positions in the private sector or elsewhere in the public sector), perhaps with some grade inflation thrown in (people who aren’t really senior or principal analyst material getting given those titles and salaries). Moving simply because it is the only way to get a pay rise – in a generally overheated labour market – makes sense for the individual, but almost certainly does not for the public sector as a whole.
(And here I am not entering into questions of whether public sector salaries are generally too high (or not) or the size of the public sector: issues for other people on another day.)
Zero staff turnover would generally not be desirable. When I used to pay more attention to these things at the Bank we used to be told that for established well-run professional organisations a 10-15 per cent annual turnover rate was fairly normal (perhaps coincidentally that was the rate the Bank tended to have). I find it harder to believe that 25-30 per cent annual turnover rates – as at The Treasury – is entirely healthy, no matter how much you might encourage rotation, fresh opportunities etc. But one would have to hope that the 2022 turnover rates for all these public sector agencies prove to be peaks, and that by the 2023 and (especially) 2024 annual reports, staff turnover has settled back to much more normal levels for organisations of this sort. Whatever your view of the appropriate size of government, what agencies we do need need capable and experienced staff.
A consistent theme of this blog over the 3.5 years since the Monetary Policy Committee was established has been the severe inadequacies in the way the MPC was designed, and in the way it has been staffed. Last Tuesday, Stuff journalist Tom Pullar-Strecker had an article that reported on a variety of similar concerns, informed by extensive comments from former Reserve Bank chief economist John McDermott. A particular focus was on the role of the non-executive members (“the externals”).
At the press conference for the Monetary Policy Statement Pullar-Strecker asked the Governor about the externals, and if he didn’t get far (the awkward questions at that press conference were mostly left completely unaddressed), he did get from Orr an observation that externals were free to talk, subject to (Orr’s interpretation of) the MPC Charter provisions (in turn agreed by Orr and the Minister) under which for the first 24 hours after an MPS the Governor was the sole spokesperson for the Committee. It rather invited questions once that 24 hour window had passed.
And it seems that Pullar-Strecker did. Just before 5pm yesterday a document headed “Monetary Policy Committe (MPC) external committee member Peter Harris responds to media questions” dropped into the inboxes of anyone signed up for Reserve Bank announcements. Given the context, it was pretty obvious that the questions were from Pullar-Strecker (later confirmed by him and his story), but the Reserve Bank was at pains to keep anonymous the media outlet, even deleting a reference to Stuff in one of the reporter’s questions.
Kudos to Pullar-Strecker for pursuing the issue. In 3.5 years of the MPC’s life, it is only the second interview ever granted by an external MPC member (there was some comments by Harris to Bloomberg a couple of years back), despite the huge power that (on paper anyway) MPC members wield, not to speak of the mayhem (inflation, looming recession) now following in their wake.
Unfortunately, if the Bank can now push back and say “see, Harris did (another) interview”, the substance of the interview mostly just serves to confirm doubts about the institution and the individuals. From their perspective it is hard to see what, if anything, is gained by choosing to make him available in this way (and I don’t think we need to doubt that doing the interview will have had the sign-off of the Governor, and was perhaps encouraged by him). At times, Harris displays all the grace and constructive open and engagement we might expect in a rebellious 15 year old told they have to make conversation with Grandma at the family Christmas celebrations. If the answers aren’t quite monosyllabic grunts. most of them might as well be.
Since it is important background to the interview, here is the relevant section of the MPC Charter.
I don’t suppose anyone has any particular problem with a), b) and d). In fact, from a) one might positively welcome the explicit mention of the notion that communications should contribute to the accountability of the MPC. The focus is on c). If one interprets the first two sentences as being about the most recent decisions, there isn’t too much problematic there, at least in principle, given the model that favours consensus decisionmaking. After all, good minutes of the MPC meetings (unlike the ones we have) would give considerable weight to outlining the conflicting arguments, perspectives, considerations, and some members might reasonably emphasise some of those rather than others (a consensus decision that everyone can “live with” – the Governor’s own word – does not necessarily mean everyone came to that decision for the same reasons.
Note that the Charter does not prevent – in fact explicitly allows for – members from expressing “his or her view around the balance of risks and/or economic outlook”. As the Governor put it last week, there are some courtesies to be observed (let your colleagues know in advance, don’t attack other individual members’ views in public). And there is the requirement that “such communication is advised in advance and on the record (on the Bank’s website) in real-time”. There is certainly no obstacle to recent MPC members reflecting on what has passed, or on the structure, processes etc of the MPC. Note too that the Charter applies to all MPC members, not just the externals
That final provision in c) looks to have been designed to cater for MPC member speeches. It is easy to announce in advance that an address will be being given and to commit to release the text on the Bank’s website when the address is being given. Whether speakers stick to their written text – Orr apparently rarely does – is perhaps harder to police.
Note, however, that there was no advance notice of the Harris interview, so the Bank – which issued the statement on Harris’s behalf – appears to have been complicit in breach of the Charter. More generally, although the text of this interview is available on the Bank’s website, no other interviews by MPC members are (in the last few days for example, Conway with Bernard Hickey, Hawkesby with Stuff, Silk with Reuters – as it happens, each of those MPC members talking about more market-sensitive stuff than Harris ended up doing). It isn’t uncommon for (internal) MPC members to give interviews to media outlets and (a) never provide transcripts, and (b) which are behind paywalls. The Charter looks like it could do with an amendment to require that the text of any media interview with an MPC member in their MPC capacity should be published on the Bank’s website simultaneously with the story published by the interviewing outlet. That is the sort of approach an organisation seriously committed to transparency would take.
On this occasion, the Bank’s approach – emailing out the text – looks to have been some sort of revenge play, undermining the capacity of the journalist to break a story from the interview, in return for the offence of challenging the Bank/MPC. The rules and practices depend on how compliant the journalist is. Pullar-Strecker noted on Twitter that the Bank had not even told him this was the approach they were going to take.
What of the substance of Peter Harris’s interview.
It begins with this rather defensive ‘overarching caveat”
Except that Conway, Silk, and Hawkesby had each given fairly extensive interviews in recent days. The Charter just is not that constraining, unless you want to avoid scrutiny/comment (or, more generally, Orr seems to favour internal members, who of course directly answer to him). Now, it is fair to note that none of those internal member interviewees were actively advancing alternative perspectives on the inflation and monetary policy outlook, but they weren’t all simply reciting already-published lines either (from Silk we learned that apparently we will have only a “technical recession”, from Hawkesby – rather better qualified to comment – that actually these things are often quite a bit sharper than forecast).
Before proceeding further I should say that I didn’t think all the questions to Harris were particularly well-framed. But it is pretty standard media advice that you answer the question you want to answer. If the question is ill-phrased or not really to the point, answer another one. And if you and your organisation are really committed to being “transparent, open, and accountable” do it in an open, constructive and positive way, not grudgingly or petulantly.
Surely he could have come up with a more constructive response than that? It was, after all, a reasonable question when Orr highlights that all the MPC members were present, but only he and his direct reports were able to say anything. No one forced them to be there, so what did they themselves see the point as having been?
This was interesting, suggesting that Harris had the questions in writing so had had the opportunity to think – and take advice – about how to respond.
As far as I can see none of the questions on monetary policy itself went beyond the sort of thing the internal MPC members were answering in their recent interviews. The journalist pushes back
Which surely leaves everyone confused. The transcript of this interview was published in full on the Bank’s website. If MPC members really aren’t allowed to interviews, why is he doing one?
Even if you don’t want to say much of substance, there are ways of answering these questions that don’t come across as deliberately obstructive, and indeed might offer some insight on the value (or otherwise) a particular MPC member is adding. To take the second question as an example, it was an easy invitation to say something like “yes, but of course any medium-term forecast is inevitably not that much better than a shot in the dark – that is the nature of economics and economies – and mostly likely a lot will turn out different. It is our – my – best view for now, but our processes emphasise holding any view lightly, and regularly updating our forecasts and policy”.
The interview continues
I have no idea what the final sentence is supposed to mean. Of the rest, when a family member read the interview they commented of the first sentence “is he 35?”. In fact, Harris is a lot closer to 70. If he really believes the first sentence – against the backdrop of the 1970s and 80s New Zealand – at very least the claim needs more elaboration. As it is, it simply seems designed as cover for the Bank’s failure (in company with many other central banks).
The interview continues
What an extraordinary claim: worst inflation outbreak in decades, MPC now aiming for a recession to reverse it,, not to speak of crisis lending programmes running on years after the crisis (something even management suggests they might have done better) and $9bn+ losses on the LSAP programme, and even “with hindsight I would have done exactly what we did”. It might be one thing to argue that “only with hindsight would I have done things much differently”, but “with hindsight I’d have done exactly what we did” is….well, almost beyond words. And all that apocalyptic rhetoric……I mean, with hindsight it is clear that “every analyst” (and more importantly in this context, every MPC) was wrong. With hindsight, they were mirages not the Four Horsemen.
He does go on after the one word (“Process”) to describe that process. The internal process doesn’t sound to have changed much since the decades I spent on the internal advisory MPC/OCRAG, but perhaps it is worth noting that in those days unanimity among the Governor’s advisers (it was then finally solely his call) wasn’t that common – in fact, successive Governors had us each put our recommendations in writing, initially without seeing what others were recommending, precisely to limit the risk of groupthink or peer pressure towards the end of the process. It is a very poor reflection on all involved that through the period of great uncertainty and the worst monetary policy stuff-up since the 1989 Reserve Bank Act gave the power to the Bank, not one MPC member, not even once, felt and reasoned sufficiently strongly as to dissent, on anything. Even now, no external MPC member has given us their own accounting for the handling of the last three years (beyond Harris’s “with hindsight we did it right”). Note that the recent Reserve Bank self-review is a management document, and I have an OIA request in at present to try to learn what the externals contributed and whether or not they agreed.
The interviews ends with two answers that sum up the grudging approach
Surely the first of those questions could have been treated as an open invitation to talk expansively about how “I can’t be certain about that, but let me tell you about what I think I as an external member have been able to bring to the table [as someone with decades of experience in New Zealand economic policy, strong connections to the labour market, as someone standing outside the day to day pressure staff and management face, as someone willing to ask awkward questions as part of a confidential deliberative process] – or whatever value he thinks he has offered.
And the final question? What would have been wrong with a more gracious “look others will have to be the judge of that, but I wouldn’t have accepted appointment and reappointment if I hadn’t thought I was adding value. If I can’t be totally detached in assessing my own contribution, when I look at my colleagues – Bob Buckle and Caroline Saunders – I can see the impact they’ve had around the table, the questions they’ve posed, the research they’ve helped spark.” and so on?
It was, of course, a shame that the interviewer didn’t also ask Harris to justify the exclusion of people with current expertise in matters monetary and macroeconomic from serving as external members of the Committee. It wasn’t his choice – Orr, Quigley and Robertson did that – but he now has the benefit of 3.5 years serving on a New Zealand MPC as an external member, and it would be quite reasonable to seek his perspective (and not at all in breach of the charter for him to have given a substantive answer).
We need a better model, and we need better people (internal and external) on the MPC. While perhaps it is better than nothing to have had this Haris interview, the substance (or lack) of it only tends to confirm how poorly we are being served.
I watched the Q&A interview yesterday with the Leader of the Opposition Chris Luxon. Monetary policy and the position of the Reserve Bank Governor came up.
It is really quite disappointing that the Minister of Finance, presumably with the acquiescence of the Prime Minister, has so politicised the situation that a Leader of the Opposition can reasonably be asked what he would expect (eg possible resignation) of the Reserve Bank Governor after the election if National wins. If he is at all serious about his answer – appoint an independent reviewer as soon as they take office and only decide after that – it is a recipe for considerable, unwelcome, market uncertainty, and further reputational risk for New Zealand and its system of economic governance.
We really should have appointees to such positions that both sides of politics can respect and trust. That has always been implicit in the model under which the central bank is given operational autonomy over monetary policy (and the massive cyclical influence that involves), the Governor (and MPC members) are appointed for terms not coinciding with, and longer than, parliamentary terms, and (in NZ since 1990) where the Minister of Finance cannot simply appoint his or her own person as Governor. That expectation was further reinforced when the current Prime Minister and Minister of Finance in 2018 amended the Reserve Bank Act to explicitly require consultation with other parties in Parliament before a person is (re)appointed as Governor.
When Adrian Orr was first appointed at the end of 2017 that “general acceptance” threshold was probably met. There was plenty of Orr sceptics about. although often rather quietly (since they or their employers had to deal with either NZSF or the Reserve Bank, and Orr was never known for embracing criticism), but there was no great controversy about the appointment (as it happened the search and selection process had been well underway before the election and change of government, and the Bank’s Board – which put forward Orr’s nomination – had been entirely appointed by the previous National government).
It isn’t the case now. The two main Opposition parties had both made clear to the government, when the legally-required consultation occurred, that they had concerns about the proposed reappointment. But there has been no hint or sign that the Minister of Finance made any effort to engage to allay those concerns, instead – his own legislation notwithstanding – he simply pushed ahead and reappointed Orr, having had the nomination made by the new Reserve Bank Board, possessed of almost no subject expertise, he himself had appointed just a couple of months earlier. Perhaps a bit like the entrenchment outrage in the headlines today, it was lawful (much is in New Zealand) but it was far from proper.
(As I’ve pointed out before the actual argument National made in their letter re Orr was weak and their historical parallel was flawed, but then they were caught in a difficult position – unless Robertson heeded their concerns and looked elsewhere for a new Governor, they could be stuck with Orr as Governor, almost certainly unable to dismiss him (unless he did something particularly new and egregious in his new term) – and may have felt reluctant to outline a range of specific concerns about Orr and his stewardship in writing.)
TVNZ’s interviewer, who usually does a fairly good job, seemed to come to yesterday’s interview holding a brief for Orr. Among the lines he put to Luxon was the suggestion that he shouldn’t be too critical or Orr and the Bank because they had been the first developed country to raise their policy interest rate. This is the sort of spin the Bank itself likes to hear, and it uses a more-muted version of it at times. I don’t know how many times it has to be said but it is simply a false claim. It isn’t a matter of interpretation or nuance, it is simply false.
There are probably two main sets of groupings that are used to capture a list of developed countries or advanced economies. The first is membership of the OECD, and the second is the IMF’s “advanced economies” groupings. Neither is ideal. The OECD includes several Latin American countries (Costa Rica, Colombia, Chile, and Mexico) that are mostly much poorer and less productive than other members (I’ve often suggested they are “diversity hires”),and excludes Singapore and Taiwan. The IMF list on the other hand does not include any of the Latin American countries, but in central and eastern Europe seems to include countries if they are in the euro but not if not, even if the latter are equally productive. Since so many advanced countries are in the euro, there are really only 20 or so countries with monetary autonomy, setting their own interest rate.
On several occasions in the past on Twitter I’ve used the BIS’s monthly data on policy interest rates. Of the countries there that are on either the OECD or IMF lists, these were the first countries to raise policy interest rates in 2021.
Discount Mexico and Chile if you like and you are still left with five advanced country central banks having moved before our Reserve Bank did, all of them for countries that are either materially richer/more productive than New Zealand or (Korea, Hungary, Czech Republic) about the same. You could make further allowance for the Reserve Bank and accept that if their MPC meeting in August 2021 had been a day earlier, the OCR would first have been raised then, but they still wouldn’t have been the first to move.
There is no question but that our Reserve Bank moved earlier than the other Anglo central banks (or even the ECB) but what of it?
More generally, when individual central banks moved (early or late in calendar time) is really neither here nor there anyway. Each central bank faced different domestic situations in terms of capacity pressures, emergent inflation, and the core inflation outlook.
I’m not going to attempt to analyse the story each central bank faced last year, but I’ve shown this chart in a previous post.
On the most recent data, for the only internationally comparable measure of core inflation we readily have, New Zealand’s core inflation rate now – a year on from the first OCR increase – is nothing special, being just above that of the median OECD country. If we focus only on OECD countries with their own monetary policies (and the euro area as a single observation) we get this chart showing the increase in the core inflation rate since just prior to Covid (actual Turkey increase is far larger than the scale allows).
It isn’t one of the worst, but again it is slightly worse than the median country (and, as it happens, worse than in three of the four Anglo countries, and worse than the euro area).
This isn’t another post trying to evaluate in any detail the Bank’s absolute or relative performance, but as a general observation almost all central banks have done poorly in the last couple of years, and little about the Reserve Bank’s policies or policy outcomes stands out from the pack. Media defenders of the Governor should take note, and/or get better basic researchers.
What the post is mainly about is central bank appointments. We’ve had some dreadful ones this year – the deputy chief executive responsible for matters macroeconomic who has no background or evident expertise in the subject, and who yet is a full voting MPC member, and (see above) the reappointment of the Governor. Then there was the decision (apparently joint between the Governor, Minister and (old) Board) to keep in place the blackball prohibiting anyone with current in-depth expertise in matters macroeconomic or monetary from serving on the MPC, all as prelude to the reappointment without much scrutiny of two external MPC members whose terms were expiring.
On which note, I had another OIA request back the other day, which included the letter from the Reserve Bank Board chair to the Minister of Finance recommending those reappointments. It was perhaps even more lame than I had expected. There was no attempt to evaluate or describe the contributions Buckle and Harris had made, nothing at all about the rapidly rising (core) inflation backdrop for which they shared responsibility, no suggestion of having considered any alternative candidates (neither Buckle nor Harris are young). In fact, the strongest (only) argument for reappointment seems to have been that “the Bank is implementing a number of significant changes in governance in accordance with its new legislation”, even though almost none of the 2021 Act had anything to do with monetary policy or the MPC
That letter did, however, partly answer one question I’d had. Peter Harris – former politically-appointed adviser in Michael Cullen’s office – was reappointed for a term of only 18 months to expire on 1 October 2023, right in the middle of the likely election campaign. Why, I wondered, would Robertson have done that – ministers after all being well aware of the convention that new appointments should not be made to positions starting close to likely election dates? But it turns out it was the Board’s doing, and there is no sign they gave any thought to the fact that the end of Harris’s term was going to land in the midst of the election period. Which seems quite unnecessarily careless of them. One hopes there is no question of any new appointment being made until after the election. If National were to win, the vacancy would give them an opportunity to begin to exert some influence; one would hope they would remove the bar on expertise, and at the same time amend the MPC’s charter to make it clearer that individual members were expected to bring expertise to bear and to be individually accountable.
But the current government is quite free to make the next MPC appointment. The worst of the first batch of external MPC members was Caroline Saunders. Her term expires on 31 March 2023. The papers released at the time of those 2019 appointments make it pretty clear that she was a diversity hire. Professor Saunders may be very capable in her own field but she has no background at all in macroeconomics or monetary policy. Consistent with that, we have heard not a word from here in her (almost) four years on the MPC. She has taken the taxpayers’ dime and there is no evidence she has made any contribution at all, and has done or said nothing – no speech, no interview, no parliamentary committee appearance – to provide any basis for holding her to account, even as she shares formal responsibility for the biggest monetary policy stuff-up in decades
It would be quite unfortunate if Saunders is reappointed (but most probably it is already a fait accompli, given that no vacancies have been advertised). If there was ever a case for a token female appointment (which there wasn’t; token appointees are never desirable), the ultimate in token appointees now holds a senior executive role on the committee. More generally, in any body – public or private – fresh blood should be introduced from time to time, and yet none of the externals has been changed, and (by the rules they themselves signed up to) those members are not allowed to foster any independent subject expertise themselves in their time on the MPC (and the Bank has been doing very little serious research, so there won’t be much expertise being fostered/extended inside). From a narrowly political perspective, one might have thought it might have been in the government’s interest to have found a strong new appointee who might have a good chance of doing two future terms.
Which bring us back to Luxon. It isn’t clear that National cares very much about any of this,or will fllow through if and when it takes office (why rock the boat when you now have an office to hold and savour?). I’m not at all optimistic, but if they are more serious than they seem, here was a post outlining some of things they could look at.
croaking cassandra 