My post this morning was based on Adrian Orr’s Q&A interview as found on TVNZ+. However, it turns out that that wasn’t the full interview which (thanks to the kind people at Q&A for pointing me to it) is now available on Q&A’s Youtube account here. The full interview is almost half an hour, and is probably worth watching if you haven’t already watched the selections on TVNZ+ – it is a more rounded presentation and chance for Orr to tell his story.

As in the previous post, there was something in this bit of the interview where I welcomed the Governor’s comments. He lamented the underinvestment in official economic statistics, that has gone on for decades now, and suggested governments really should do better. And while he noted (fairly) that there is a lot more other data than there used to be, it remains something of an open question (would be interesting to see RB analysis of it) as to whether the Bank and other forecasters have gotten any better at recognising early quite what is going on in the economy and inflation. Perhaps 2020/21 was an unfair test, but we’ve seen a lot of lurches even this year from the MPC. But if the Governor is championing full monthly CPI and HLFS data and more timely GDP data, I can only agree with him.

But if that was the positive, there were plenty of things to lament in the Governor’s comments in the extended interview.

There were, for example, outright falsehoods. Thus, he talked of his European peers having struggled with inflation in excess of 20 per cent per annum. As far I can see, the only OECD European central bank that faced an inflation rate that high was Hungary (briefly) although a couple of others were in the high teens for a while. Gas prices severely affected headline – but not core – inflation, and New Zealand (and Australia) weren’t exposed to that post-Ukraine shock. In the euro-area (most of Europe) headline inflation peaked – gas shock – at 10.6 per cent. The Governor then claimed that the UK had had 15 per cent inflation. That didn’t sound right either.

11.1 per cent isn’t even close to 15 per cent. Why does he just make these things up?

(And a reminder of the graph in this morning’s post: on core inflation (the bit central banks do much about) we were simply middle of the pack in the OECD.

I noted this morning that the LSAP hadn’t come up in that bit of the interview. It did in the fuller interview, and sure enough we get the repeated Orr make-believe blustery arguments. Not only had the Bank’s interventions saved the economy from a “deep recession” (quite how when as the Governor correctly notes the lags in monetary policy are long, and GDP here quickly rebounded after the first lockdown), but the costs (the $11bn or so of losses to the taxpayer) were “more than overwhelmed” by the “net benefits”. The net benefits have never been successfully identified, and the absurd claim needs to be read against the fact that overall Reserve Bank monetary policy calls led to the economy massively overheating, a severe outbreak of core inflation, big redistributions, and then a protracted – if not overly deep – recession to get things back to balance. Whatever the good intentions, there simply were no “net benefits” (probably few gross ones either) and large losses to the taxpayer. But Orr never engages straightforwardly on such issues. (For anyone who listens he cited some IMF work – I picked apart an earlier piece from the IMF on this issue here : the IMF had simply imagined a world (and economy) quite different from what New Zealand actually experienced.)

There were two other interesting lines from Orr.

The first was a bold statement that banks had been making “excessive profits”. Not high, but “excessive”. Quite what basis he as prudential regulator had for that claim isn’t clear, but he has long had it in for the Australian banks. He seems to consider it somehow unfair that the Australian banks are efficient low-cost operators.

And the second was the claim that we are seeing unusual (greater than previously) changes in relative prices globally. Since oil prices were one of those he mentioned, here is a long-term chart

The alleged greater volatility isn’t apparent there. Perhaps there is something to the claim more generally (would be interesting to see the analysis and data), but it seems unlikely, and perhaps particularly in the New Zealand context, where one of our most important relative prices is the exchange rate, which has displayed remarkably greater stability in the last decade or more than in the first 25 years after it was floated.

Orr also claimed that inflation itself was going to be more variable, but again it isn’t obvious. There has been a bad outbreak of inflation a few years ago, now brought back under control, but is there really any evidence (beyond the Governor’s desperate desire to talk about climate change) for the proposition, or that it would matter if it were true (headline vs core considerations again)?

Towards the end, Orr was talking up the strength of the Bank, notably the Board (signally underskilled in fact, with a chair reappointed who did/said nothing about the mistakes of recent years) and the MPC (most of whom we never or very rarely hear from, at least one of whom has no relevant qualifications at all). As for the rest of the senior management, those I have anything to do with (several) simply aren’t very impressive (in two cases “not very impressive” is to flatter). Perhaps when standards are that low Orr gets away with the sort of loose language, bluster, and Trumpian-style false claims internally (as well as the intolerance of dissent etc that he is known for). But it shouldn’t be acceptable in such a powerful figure, and if central bank Governors are never going to be some sort of single source of truth, at very least they should (a) prompt one to think, and b) not prompt one to worry that yet another claim just bore little or no relation to reality.

But this is latter day New Zealand.

The Reserve Bank Governor has given an interview to TVNZ’s Katie Bradford, apparently done under the aegis of the Q&A show but too late in the year to actually be broadcast on Q&A itself or to be done by Jack Tame, Q&A’s regular and most demanding interviewer.

There is a TVNZ article reporting the interview here, and you can find the full thing (only about 13 minutes) somewhere on TVNZ+ (my son found it for me). [UPDATE: Apparently that was only half the interview and the full 26 minutes is on the Q&A Youtube account.]

What is reported in the article is pretty breathtaking, with Orr reported as standing by his (or, presumably, the MPC’s) decisions during and since Covid with no apparent regrets, and then moving on to attack the public and the media for being focused on housing and house prices. We – and he – might regret the fact that we do not have a well-functioning land supply/use policy regime, but we don’t, and haven’t done so for decades, so it should hardly be a surprise (or a cause for attack/lament) that when interest rates are cut in what proves to be an overheating economy house prices go up.

But it got a whole lot worse when I listened to the full interview itself, where Orr seemed to just play on the fact that his interviewer wasn’t a specialist (with all the facts at her finger tips) to simply run claims that he knows not to be true. It was a reprise of his form earlier in this cycle when he repeatedly and deliberately misled Parliament’s FEC (but so supine are our democratic institutions that there were no consequences for what Parliament’s website solemnly assures us is a serious offence).

Orr was asked whether the Bank had been too slow to raise rates (of course it was, as the Bank has even grudgingly acknowledged in the past). His response was to claim that the Reserve Bank of New Zealand was the 2nd or 3rd central bank to raise rates in 2021. It simply wasn’t so. Even among OECD economies – and there are only about 20 separate monetary policy areas in it (much of the OECD having just the euro) – the Reserve Bank was the 8th (equal) to move (those moving ahead of us were Iceland, Norway, South Korea, Mexico, Chile, Czech Republic, Hungary). Perhaps as importantly, the issue should never be about who went first or second, but whether a particular national authority moved sufficiently early and aggressively for the circumstances their own economy faced. On IMF estimates, New Zealand had the most overheated economy of any of the advanced country monetary areas it does the numbers for (a group which doesn’t include all those in the list above, but does include the US, UK, Canada, Australia, Japan).

Orr then went to the claim that the Bank had been “lauded internationally – although not domestically” for being one of the most responsive central banks. It is certainly true that some market commentators have run such a line, but almost all of them seem to have had in mind the big countries and the Anglo countries, not the wider group of OECD economies. The Reserve Bank certainly wasn’t the slowest to move, but then it was dealing with a really badly overheated economy and should have moved a lot earlier. Their mistakes weren’t unique – misreading economies and pandemic macroeconomics was a common mistake, among central banks and private commentators – but they voluntarily took on the power and responsibility in New Zealand, and they actually made the bad policy calls, including increasing rates too late and initially far too sluggishly. Other people can hold their central banks to account.

(And, of course, the MPC also lost $11 billion or so or taxpayers’ money punting in the bond market. TVNZ didn’t ask about that particular bad call so we were spared a repeat of Orr’s blustering attempts to defend that. Puts the cost of running an RNZN vessel straight onto a reef not realising the autopilot was still on in some perspective….)

And then Orr claimed that the Reserve Bank was one of the few central banks confidently reducing policy rates. Which was a bit odd when most advanced country central banks have been reducing policy rates in recent months (obvious exceptions being Australia and Japan). But don’t let the facts get in the way of the Governor’s spin.

He had the gall to round off that section of the interview by suggesting, rather patronisingly, to Bradford that “your potted history is kind of incorrect”. Dear, oh dear. This from a very senior and powerful public official. Is this the sort of thing the Minister of Finance expects/tolerates? (Well, on the evidence so far anything goes.)

Bradford moved on. As was accepted, had it not been for the Covid outbreak in Auckland, the Bank would have started tightening at the August 2021 MPS (they actually started at the next review). So Bradford took a look at the projections in that Monetary Policy Statement. She pointed out (correctly) that in those projections, annual inflation was expected to be back down to 2.2 per cent by the year to September 2022 (with, as it happens, very little monetary policy help at all: as everyone agrees, there are long lags, and by the end of 2021 the OCR was expected to be only 0.75 per cent). I guess her point (obviously correct) is that the Bank was still badly misreading things by that point (and of course even now annual core inflation is still somewhere between 2.5 and 3 per cent, having required an OCR at 5.5 per cent to bring that about).

But Orr wasn’t going to be bothered engaging with facts. Instead, we got the same old outrageous claims he used to try to fob Parliament off with. “Do you know what happened after that [August 2021]”, he asked. “We had the Ukraine invasion, rising food prices”, going on to add in cyclone effects and so on. He even had the gall to suggest that we had among the lowest inflation rate peaks in the OECD and that European countries had been dealing with 20 per cent inflation. It is an outrageous attempt to mislead and distract, simply breathtakingly dishonest, and especially so when set against any discussion of core inflation or the economic overheating. Take the New Zealand labour market for example: the unemployment reached its lowest level (extremely overheated) in the December quarter of 2021 (ie before the invasion), oil price pressures from the invasion never lasted long, and…..as importantly….both food and energy prices are typically “looked through” by central bank policymakers focusing on core inflation. On CPI ex food and energy measures, New Zealand’s peak was about middle of the pack among OECD countries (and the extreme headline numbers in a few countries were largely the result of the gas price shock to which New Zealand – no pipeline or LNG trade – was not exposed).

As for cyclone effects on inflation, one of his own managers contradicted Orr in front of FEC last year, to confirm that any effect was actually very small.

Orr then moved on to an interesting claim (that I have not heard him make before, and which has not been documented in any published papers or material in MPSs) claiming a) that to have kept core inflation in the 1-3 per cent range the OCR would have to have been raised to 7 per cent on the first day of the pandemic, and b) that even if that had been done we’d still have had 6 per cent headline inflation. Neither result seems very likely, and given Orr’s record of just making stuff up should be heavily discounted unless/until they produce some robust formal estimates. On Orr’s telling it would have taken more monetary restraint to stop inflation getting away than it actually took to bring it down again once it had gotten away. That doesn’t seem very likely, and perhaps a useful counterpoint is the experience of Japan and Switzerland which didn’t cut policy rates into the pandemic, and didn’t see a particularly severe later inflation experience. As for the 6 per cent claim, that seems simply preposterous, since there has been no time in the last few years when the gap between headline and core inflation has been anything like as large as 3 percentage points.

Later in the interview, questioning moved on to fiscal policy. Here I will give Orr credit on one point: he explicitly corrected the journalist to note that the current goverment had certainly cut spending, but that it had also cut taxes, and that the two effects were roughly even. This is exactly consistent with the estimates in Treasury’s cyclically-adjusted balance series (chart in Monday’s post), in which this year’s deficit is just a touch larger than last year’s. Of course, it would have been nice had the Bank made this point in its MPSs, instead of spending the last 18 months – both governments – avoiding the issue and focusing on largely irrelevant series of government consumption and investment spending (rather than the cylically-relevant) fiscal balance and fiscal impulse measures.

For the rest of it, Orr was back in his preferred space, playing politician and advancing personal political and ideological agendas that are simply out his bailiwick. It was, we were told, critical for governments around the world to close infrastructure deficits and New Zealand’s was “one of the worst”. He appeared to attack a focus on reducing deficits and keep government debt in check, suggesting that the government needed to spend “a lot more” on infrastructure, suggesting that New Zealand had been failing in this area since World War Two (a claim that of course went unexamined – in fairness no time – but presumably includes overbuilt hydro power capacity, sealed roads in the middle of nowhere etc). Now, in fairness, he did also talk about enabling private capital – this the same Governor who only a few months ago was bagging foreign investment – but the overwhelming tone was to welcome more public debt. Waxing eloquent he launched into Labour Party and left wing themes about how great it would be if governments were investing and delivering more “social cohesion” (around whose values Governor?), an “inclusive economy” and so on.

In any sane environment it would have been to have significantly overstepped the mark, but Orr has done that so often – and worse, with all the misrepresentations and denials – with no consequences (no rebuke from the Board or minister(s), reappointment for a final term comfortably secured, tame board chair reappointed etc) that no doubt it will again pass with little notice.

It really was a pretty disgraceful, if again revealing, performance. But then the fact that Orr still holds office, and the incoming government – that used to rail against him and his style and the corporate bloat – has been content to see things just run on as usual, is just another sad reflection of the debased state of New Zealand public life and standards. One of many to be sure, but no less acceptable for that.

I had in mind another post for today, but this morning we had something rare: a speech about monetary policy from the Governor of the Reserve Bank, delivered in Washington at a think-tank which appears to have been hosting many speakers this week (in town for the IMF World Bank Annual Meetings). On their schedule, the Deputy Governor of the Banque de France was speaking earlier in the afternoon (some very interesting material in her presentation) and the Prime Minister of Liechtenstein a bit later.

The Governor’s wife writes fiction (several books published) and teaches creative writing. Entirely laudable and there are often powerful insights in great works of fiction. But when – as her husband does – fiction and sheer spin are dressed up as serious accounts of policy stewardship etc, the only possible insight is into the character of the chancer who tries it on. And perhaps those who enable him (one could think of Neil Quigley and Grant Robertson, but also now (sadly) of Nicola Willis).

But first a point to his credit. Climate change, for example, didn’t get mentioned even once in the speech. Or the treaty of Waitangi. It had the appearance of a straight up and down speech about monetary policy stewardship, as advertised (“Navigating monetary policy through the unknown”). And, if you recall how he used to tell people (well, Parliament actually) that the Russian invasion of Ukraine was to blame for the worst New Zealand inflation in decades that line has now been quietly minimised too.

Consistent with his revealed preference for fictional embellishments, Orr builds his speech around the navigational challenges faced by ancient mariners, in his case primarily Kupe. Orr claims to know that Kupe had a clear goal in mind, and whether he did or not, (I guess he could have used Captain Cook too) but – technology having moved on – he wasn’t reliant on the sea birds etc. It still seemed a rather strange analogy to use, in 2024, in an age of GPS. Then again, I guess it is only a couple of weeks since the HMNZS Manawanui ran onto the reef, so perhaps it isn’t such a bad analogy for New Zealand monetary policy after all. Perhaps the salvage will be done well, at considerable costs (perhaps lingering costs for the people of Samoa) but the ship never should have ended up on the reef in the first place. Those responsible for the loss of a ship face courts of inquiry, perhaps even a Court Martial.

But in Orr’s fictional world central bankers – New Zealand central bankers, since his speech does actually concentrate on New Zealand – are heroes, having delivered us to the least-bad possible outcomes through the storms, vicissitudes and other uncertainties of the last few years, where anything bad was no one’s responsibility, and anything good was to the credit of the wise and respected navigators, led by Orr himself. It was pretty breathtaking stuff really – although questionably persuasive even as fiction – as there is no longer even a hint that anything could have been done better, by our courageous central bank navigator, than it was. When the Bank reviewed its own performance a couple of years ago, they then thought it prudent to acknowledge the odd small error, even while claiming that none of it mattered much. But no longer apparently.

In his celebratory self-congratulatory mood – he claims to have saved us from two deep recessions – his overseas listeners would have had absolutely no idea that on the IMF forecasts that came out yesterday, New Zealand’s real per capita GDP growth in both 2024 and 2025 is estimated to be among the worst in the world, down there with places like Yemen and Haiti. Or that on those same IMF estimates, New Zealand will have been one of the very worst performers over the entire 2019 to 2025 period.

Now, to be fair to the Governor, one can’t blame underlying long-term productivity problems on the Reserve Bank, but equally no one really doubts that those 2024 and 2025 outcomes are mostly on monetary policy: the consequences of the Bank belatedly waking up to its past mistakes, and doing what it took to get inflation back down again. And, frankly (although the Governor won’t tell you this) anyone can get inflation back down: the trick (the reason we delegated the job to supposed experts) was never letting it get away on you (well, on us, the public) in the first place.

The spin, and utter avoidance of any responsibility, begins earlier, in fact with the Bank’s covering press release, which presumably captures the key lines Orr would like to see reported here.

First, there is this framing

Followed up in the speech with this extraordinary admission from someone charged with keeping inflation near 2 per cent.

Now, I don’t doubt that briefly in early 2020 perhaps the MPC really believed that the alternative to them acting as they did was economic disaster, but it was very quickly evident that that simply wasn’t the case. Economic indicators here rebounded quickly and early. And the MPC did nothing to start to pull back on the excessively loose monetary policy until late 2021 (it wasn’t until into 2022 that the nominal OCR was even lifted back to the immediate pre-Covid level by when inflation and inflation pressures were already running away on them): they now estimate the positive output gap was in excess of 3 per cent by late 2021. If we want to play with nautical analogies, Ulysses steered his way between Scylla and Charybdis. Orr and his team ran us onto the rocks (full blown inflation, fixed only at great cost). And he claims to have been now quite relaxed about those hugely and disruptive inflationary consequences, with all the attendant arbitrary redistributions.

And then, still with the press release, there is this

Inflation simply was not “caused by COVID-19”. With all their comms staff, this is very unlikely to be a slip of the pen, rather it is yet another in the endless series of attempts to avoid actual responsibility for doing the highly-paid job they took on so badly. No one doubts that Covid provided a context where many policymakers had to make difficult calls in conditions of great uncertainty. But it was the Reserve Bank MPC’s calls, faced with all that uncertainty and the decisions of others (since monetary policy moves last, by construction), that delivered the worst inflation in decades and the attendant cost and disruption to getting it down again. But Orr can’t or won’t admit that.

As the work fiction continues, there is no mention of the LSAP – just a couple of passing lines about how quantitative easing tools hadn’t been used in New Zealand before – or the $11 billion of losses the MPC’s choices imposed on the New Zealand taxpayer (as someone pointed out a couple of weeks ago, one could build three Dunedin hospitals for that price), and of course none of the way in which the Bank went on provided concessional lending to banks to the very end of 2022. No doubt, if challenged, Orr would bluster and repeat his utterly unsubstantiated claims that the LSAP made a big positive difference to New Zealanders, but on this occasion his fictional treatment just airbrushes it away.

I spluttered when I came to this paragraph

He chooses not to mention to his overseas audience (or to remind local readers) that his own reappointment was formally opposed by the two Opposition parties in Parliament at the time or that – as in many other countries – public discontent and inflation and the cost of living registered extremely high in opinion polls throughout, arguably playing a role in defeating the government here last year. It is hard to find anyone with any subject expertise who has any confidence in Orr (I’d mention Orr’s board, who seem to, but hardly any of them have any subject expertise).

(In case you are wondering quite what he meant, Orr’s idea of “mutiny” appears only to involve troublesome inflation expectations).

The creative writing continues as we move towards the end of the speech.

Has anyone ever associated Orr and his public communications with the word “humility”? Perhaps we might all take this as less like make-believe if it weren’t so well-documented just how many times Orr has actively misled Parliament’s Finance and Expenditure Committee (charged in part with holding him to account), or if he didn’t send out his chief economist to say “oh no, we didn’t really mean what the numbers say, and anyway it isn’t our fault but that of the tools”. Nothing, you see, is ever the fault of Orr and the MPC…..at least in this fairy tale.

It goes on.

I’m wondering how Martien Lubberink, Roger Partridge, Jenny Ruth or Nicola Willis (in her Opposition days) feel about their experiences of Orr as empathetic communicator? Disdainful bullying is probably a fairer characterisation of his style. And as for the rest of the MPC, all these supposedly-expert external members sat on the MPC right through this extreme period, and none of them ever said a word….no speeches, no serious interviews, no scrutiny by Parliament. Nothing.

Orr has the gall to then claim that it is really all in the minutes (the “Record of Meeting”) and that is only a shame that so few people, even “economic experts refer to or query” it. Which is, of course, nonsense on stilts, and just more active make believe. People read the Record of Meeting but they just don’t find much there. Despite all the uncertainties that Orr makes much of, there is never a serious sense of that in the Record of Meeting. Oh, they talk a good game, but when there is real uncertainty about important things, really able smart and engaged people will – with all goodwill – reach quite differing conclusions about where to next, and what the latest data probably mean. There is just none of that. The grapevine reports claim that there is in fact vigorous debate in the MPC, but there is not the slightest evidence of it shown to those us press-ganged into enduring the consequences of their bad calls. If the MPC really was unanimous on all but one call in the last five years, that is a very poor reflection indeed on the MPC members (some of whom are simply unfit for office, but from a couple one might have hoped for a bit more) and their chair. If not, the Record of Meeting is just comms spin.

I could go on, but will draw this to a close here. Somewhat remarkably – well, perhaps not in the fictional world Orr would prefer to draw for us – there is no mention of accountability. It was always supposed to be the price, the quid pro quo, for delegating a great deal of constrained power to central banks. Accountability was supposed to involve real consequences. And yet, through the biggest and most costly monetary policy misjudgements in decades, Orr would just prefer no one mentioned anything about accountability (or in fact about mistakes at all). I guess it is the New Zealand public sector way (as we seeing again now in the wake of revelations of obstruction and cover-ups in the context of decades of abuse of people in state care).

When captains of naval vessels made mistakes and ran their ship onto the rocks it was often considered fitting, and not inappropriate, for the captain to go down with his ship. But barefaced creative fiction, with not even a hint of contrition or regret to add nuance to the manuscript, seems to be Orr way.

There is a lot one could write about the Reserve Bank’s Monetary Policy Statement and the Governor’s (sadly all-too-typical) thin-skinned and defensive responses to questions since, whether from journalists or a lone MP at the Finance and Expenditure Committee this morning. He never ever acknowledges a mistake and seems utterly unable to cope with criticism or disagreement whether (as reports suggests) inside the Bank or (as we can all see) outside it. In a field where there is inevitably huge uncertainty, it renders him simply unfit for office. It remains appalling that Grant Robertson reappointed the Governor and that Nicola Willis just reappointed the chair of the board responsible for holding Orr to account and for having recommended – presumably captive to management – his reappointment. How much more honest – and frankly reassuring – had Orr simply stood up yesterday and noted ruefully that “perhaps our May MPS wasn’t one of our better efforts”. At least in my book, a bit of contrition and humility goes a long way.

While I want to focus on yesterday’s statement, the contrast with May, and the outlook from here, it is worth remembering that simply unacceptable as the huge flip-flop from May to July/August should be – the sort of episode that further undermines whatever respect the Reserve Bank, the MPC, and Orr himself, might command – in macroeconomic terms it matters much less than the really big mistakes from a few years back that still get far too little scrutiny, and for which there has been no accountability. Losing $11 billion of taxpayers’ money on an ill-considered huge punt in the bond market remains simply staggering. How much difference would $11bn make in, eg, our hard-pressed health sector? And then there was the small matter of the worst outbreak of core inflation in many decades, the most overheated economy in the advanced world, and the massive dislocations and redistributions that that glaring policy failure brought about. And if many other central banks made mistakes in similar directions (a) we can only hold our central bank to account (other central banks are the problem for their citizens/governments) and b) our central bank did a worse job than most (see “most overheated economy in the advanced world”). If you take the pay, prestige, and the power, there should be some serious accountability. There has been none. But to get back to the MPS.

Sometimes small things make you proud of your kids. My son is an honours student in economics, with a keen interest in monetary policy and macro. Within minutes of the release yesterday he’d spotted this and pointed it out to me

Does it matter? Not in substance of course (and if you check now, they have fixed it), but it seemed revealing of an institution that struggles to even get the basics consistently right. Excellent it is not.

That there was a huge shift from May to August isn’t really in doubt. Here are the two OCR tracks

There has been no nasty external shock in that time (global financial crisis, pandemic, collapse in commodity prices etc) but we’ve gone from a “hawkish hold” (best guess, no easing until this time next year, and possibly some tightening late this year) to not only an OCR cut now, but a really large (at peak 130 basis points) change in the projected forward track for the OCR. I can’t recall another change that large that quickly, in the absence of a major external shock, in the 27 years since the Bank started publishing these forward tracks. It was simply because Orr and the MPC badly misread how the economy was unfolding now (Orr himself made this point yesterday, when he noted that the change of stance wasn’t about the medium-term outlook, but about partial data etc about where the economy is right now.) Other commentators have used the label “U-turn”. I prefer flip-flop myself (and in reality that change wasn’t even from May to August, but was largely between May and the July OCR review just six weeks later). Getting the medium-term right is a challenge for everyone, but an MPC – delegated so much power, allegedly as technical experts – simply should not get the near-term so wrong. And its communications should be a lot of more assured and authoritative than they are (eg recall the chief economist in May attempting to blame his tools). Instead we have a central bank and MPC that no one has any confidence in or respect for – be it local observers or international markets. They wield the power of course (they still set the rates) but no one serious looks to them as an authoritative guide or interpreter, despite all the budget and analytical resource at their disposal.

What about some of the numbers? I’ve been banging on for a while about how IMF estimates suggested that New Zealand’s economy was the most overheated of any of the advanced economies in 2022. The Reserve Bank has largely avoided until now any such comparisons, so it was interesting to see this chart

accompanied by the explicit comment that “New Zealand’s output gap reached a higher level than other countries in our sample [wider than those shown in the chart] during the COIVD-19 pandemic, indicating higher capacity pressures relative to our sample countries.” As it happens, in this set of forecasts they revised further upwards the extent of that peak excess demand (“output gap”) – a really damning commentary on MPC’s stewardship a few years back.

Right now (September quarter) the Reserve Bank estimates that the output gap is about -1.8 per cent of GDP. That number will inevitably be revised, but it represents the MPC’s best guess of where we are now. There is a lot of slack in the economy (or so they think). And it is unusual for the easing phase to start when the MPC believe that so much excess capacity has already built up. The Bank hasn’t always published real-time quarterly output gap estimates, but I cannot think of a time when the first easing would have come so late (eg the first easing in 2008, in July, appears to have been when we thought the output gap was about zero, the easings in 2015 were against the backdrop of a zero output gap, and there was no negative output gap when the easing came in 2019).

The fact that the first easing is late, relative to real-time output gap estimates, is not itself a criticism. There had been a huge inflation shock, that wasn’t overly well understood, and anyone in the Reserve Bank’s shoes might understandably have been a little cautious. My concern is less on how we got here (there isn’t much point quibbling now as to whether – as I thought – the OCR should have been cut in July rather than August) but on where to from here.

In my commentary after the May MPS I included this chart and comment

Quite how was growth expected to rebound was a complete mystery then.

And although the Bank has pulled down its estimates of growth for the rest of this year, in their dramatic change in OCR track, the same puzzle remains.

Here is growth in real GDP per working age population from yesterday’s MPS (red, SNZ data, green remaining 2024 quarters, and blue beyond that)

After two years of really lousy GDP growth (sadly, needed to get inflation securely down), the Reserve Bank expects that everything on the growth front will be back to normal from the March quarter of next year. Those projected growth rates are above the Bank’s own estimates of potential GDP growth, and so the output gap is projected to close gradually.

But how? On their assumptions, the world economy remains pretty subdued, net immigration settles to a fairly low level not doing anything much to growth, reflecting the government’s numbers fiscal policy (after being slightly expansionary this year) is expected to be quite contractionary for the couple of years beyond that. Whatever useful micro reforms the government is doing don’t look large enough to make a material difference, and aren’t something cited by the Bank.

Ah, but perhaps you are thinking, monetary policy must be the answer. After all, the OCR has been cut and is projected to be cut quite a bit more over the next couple of years.

But that can’t be the answer either, because the Governor was quite explicit in his press conference yesterday that the OCR remains at or above their estimate of neutral throughout the entire forecast period (several years ahead). Easing the OCR might reduce the extent of downward pressure – and recall that the lags mean that economic activity well into next year will already be being dragged down by policy as it stood until yesterday – but it isn’t going to generate anything like above-potential growth rates. Absent other shocks (which the Bank doesn’t forecast) and by construction (the Bank’s own articulated model) you get that sort of stimulus only when the OCR is taken somewhat below neutral. (Note that as inflation expectations are likely to carry on falling as headline inflation gets back to near 2 per cent, real interest rates may still be flat or rising even when the nominal OCR is being cut).

Look back at the output gap estimates since 2000 (the period the Bank publishes for) – or even back to the 1990s – and you simply do not find a time when a negative output had emerged when it has been closed again without the OCR being taken below best estimates of neutral. It was so in the early 1990s, it was so around 2001, it was so (for far too long) after 2008, a period which encompassed the 2015/16 easings. There is simply no reason to think the economy is operating any differently now (and again the Bank has often recent years repeatedly reaffirmed that it thinks transmission mechanisms are operating normally). The economy has been taken into a hole – to get inflation down again – and to get out of the hole anything other than very very slowly needs some external intervention. That is what active discretionary monetary policy does.

And that is why, as I’ve said a few times over the last 24 hours, I wouldn’t be surprised if a year from now the OCR was 2.5 per cent, or perhaps even lower. In fact, I will be a bit bolder and say that I will surprised if it is not that low. People have looked/sounded puzzled when I’ve said it, but the logic – of the Bank’s own frameworks and projections – seems pretty clear. I don’t think it is a big call at all. On the Reserve Bank’s own numbers, the best guess of the longer-term term neutral OCR is 2.8 per cent. No one knows what the neutral OCR is with any precision whatever – it really only be revealed over time, after the event – but I don’t see any reason why, give or take say 0.5 percentage points, the Bank’s estimate should be so very wrong. My own guess is probably a bit lower, but stick with theirs for now: if neutral is 2.8 per cent then even an OCR of 2.5 per cent by this time next year is (a) barely stimulatory, and b) will have to be dealing with more disinflationary pressure that will have built up between now and then as in the meantime the OCR has been above neutral.

Frankly, it shouldn’t be a terribly controversial view (and market pricing is already well below the Bank’s projected path). Of course, there are risks to both sides, and almost inevitably some shocks (positive or negative) will change the outlook between now and then, but the simple point remains that if you run monetary policy in a highly contractionary way to get a nasty bout of inflation back down again, and in the process generate a big negative output gap, a period of stimulatory policy is likely to be required to settle back on a more normal path. On RB numbers that would mean 2.5 per cent or below, and before too long.

I’m not a big fan of central banks publishing medium-term macro forecasts – about the largely unknowable future – but when they choose to, they really should follow through on the logic of their own mental models. A significant rebound in economic growth from the start of next year simply doesn’t seem consistent – with all their other assumptions – with continued materially contractionary monetary policy settings. Stick with those settings and the recession is only even more likely to deepen.

(And finally, but fairly briefly as this post has gone long enough, could the Reserve Bank please stop playing games around fiscal policy. As I highlighted last year, they had then shifted to focusing on government consumption and investment spending, rather than deficit measures, seemingly to avoid putting any heat on the then government. They aren’t much better now. Most macroeconomic analysis around fiscal policy, here and abroad, uses measures like the cyclically-adjusted or structural balance estimates that The Treasury and the IMF/OECD produce. Those measures exist precisely to aid assessments of the impact of discretionary fiscal choices on demand, activity, and inflation pressures. On the Treasury Budget estimates, this year’s Budget means the cyclically-adjusted deficit in 24/25 is slightly larger than the estimated deficit for 23/24. It isn’t the Reserve Bank’s place normally to weigh in on what should or shouldn’t be done with fiscal policy, but they should be consistently straightforward and honest about the impact of the fiscal choices any government makes. That simply hasn’t been happening last year or this. It may be convenient for MPC members, but serving their convenience is not either our concern or their job.)

UPDATE: Finally, finally…..monetary policy (OCR) cycles, whether in New Zealand or the US, have tended to involve swings in policy rates of 500 basis points (on average, albeit with variance). We had a 525 basis point rise to deal with the inflation outbreak. We shouldn’t be at all surprised if most of that proves not something that needs to be sustained. Big lifts in policy rates are almost always followed by big cuts, and when those cuts come they usually come much more quickly than forecasters – public or private – had allowed for.