Estimating NAIRU

The Reserve Bank of New Zealand has long been averse to references to a “natural rate of unemployment” or its cognate a “non-accelerating inflation rate of unemployment” (NAIRU).  It started decades ago, when the unemployment rate was still very high, emerging from the structural reforms and disinflation efforts of the late 80s.  We didn’t want to lay ourselves open to charges, eg from Jim Anderton, that we regarded unemployment as natural or inevitable, or were indifferent to it, let alone that we were in some sense targeting a high rate of unemployment.   Such a criticism would have had little or no analytical foundation –  we and most mainstream economists held that a NAIRU or “natural” rate of unemployment was influenced largely by labour market regulation, welfare provisions, demographics, and other structural aspects (eg rate of turnover in the labour market) that were quite independent of monetary policy.  But the risk was about politics not economics, and every election there were parties looking to change the Reserve Bank Act.  And so we never referrred to NAIRUs if we could avoid it –  which we almost always could –  preferring to focus discussions of excess capacity etc on (equally unobservable) concepts such as the output gap.  In our formal models of the economy, a NAIRU or a long-run natural rate could be found lurking, but it made little difference to anything (inflation forecasts ran off output gap estimates and forecasts, not unemployment gaps).

Other central banks do things a bit differently, perhaps partly because in some cases (notably Australia and the US) there is explicit reference to employment/unemployment in monetary policy mandates those central banks are working to.   In a recent article, the Reserve Bank of Australia observed that

“When updating the economic forecasts each quarter, Bank staff use the latest estimate of the NAIRU as an input into the forecasts for inflation and wage growth”

It may not make their monetary policy decisions consistently any better than those here, but it is a difference in forecasting approach, and in how the RBA is prepared to talk about the contribution of unemployment gaps (as one indicator of excess capacity) to changes in the inflation rate.

I’ve been arguing for some years –  first inside the Bank, and more recently outside –  that our Reserve Bank put too little emphasis (basically none) on unemployment gaps (between the actual unemployment rates and the best estimate of a NAIRU).  It has been the only central bank in the advanced world to start two tightening cycles since 2009, only to have to reverse both, and I had noted that this outcome (the reversals) wasn’t that surprising when for years the unemployment rate had been above any plausible estimate of the NAIRU.   The Bank sought to fob off criticisms like this with a new higher-tech indicator of labour market capacity (LUCI) –  touted by the Deputy Governor in a speech, used in MPSs etc – only for that indicator to end badly and quietly disappear.

But since the change of government  –  a government promising to add an explicit employment dimension to the Bank’s monetary policy objective (now only 12 days to go til the new Governor and we still haven’t seen the new PTA version) –  there has been some pressure for the Bank to be a bit more explicit about how it sees, and thinks about, excess capacity in the labour market, including through a NAIRU lens.  In last month’s Monetary Policy Statement, they told us their point estimate of the NAIRU (4.7 per cent) and in the subsequent press conference, the Governors told us about the confidence bands around those estimates.  All this was referenced to an as-yet-unpublished staff research paper (which still seems an odd inversion – senior management touting the results before the research has had any external scrutiny).

Last week, the research paper was published.  Like all RB research paper it carries a disclaimer that the views are not necessarily those of the Reserve Bank, but given the sensitivity of the issue, and the reliance on the paper at the MPS press conference, it seems safe to assume that the paper contains nothing that current management is unhappy with.  What the new Governor will make of it only time will tell.

There was interesting material on the very first page, where the authors talk about the role of monetary policy.

The focus of monetary policy is to minimise fluctuations in cyclical unemployment, as indicated by the gap between the unemployment rate and the NAIRU, while also maintaining its objective of price stability.

I would very much agree.  In fact, that way of stating the goal of monetary policy isn’t far from the sort of wording I suggested be used in the amended Reserve Bank Act. Active discretionary monetary policy exists for economic stabilisation purposes, subject to a price stability constraint.  But the words are very different from what one has typically seen from the Reserve Bank over the years (including, for example, in their Briefing to the Incoming Minister late last year).

But the focus of the research paper isn’t on policy, but on estimation.  The authors use a couple of different techniques to estimate time-varying NAIRUs.   Since the NAIRU isn’t directly observable, it needs to be backed-out of the other observable data (on, eg, inflation, wages, unemployment, inflation expectations) and there are various ways to do that.   The authors draw a distinction between a “natural rate of unemployment” and the NAIRU: the former, conceptually is slower moving (in response to changes in structural fundamentals –  regulation, demographics etc), while the NAIRU can be more cyclical but tends back over time to the longer-term natural rate.  I’m not myself convinced the distinction is that important –  and may actually be harmful rhetorically –  but here I’m mostly just reporting what the Bank has done.

The first set of estimates of the NAIRU are done using a Phillips curve, in which wage or price inflation is a function of inflation expectations, the gap between the NAIRU and the unemployment rate, and some near-term supply shocks (eg oil price shocks).  Here is their chart showing the three variants the estimate, and the average of those variants.

nairu estimates.png

Perhaps it might trouble you (as it does me) but the authors never mention that their current estimates of the New Zealand NAIRU, using this (pretty common) approach, are that it has been increasing for the last few years.    Frankly, it doesn’t seem very likely that the “true” NAIRU has been increasing –  there hadn’t been an increase in labour market regulation, the welfare system hadn’t been becoming more generous, and demographic factors (a rising share of older workers) have been tending to lower the NAIRU.

As it happens, the authors have some other estimates, this time derived from a small structural model of the economy.


Even on this, rather more variable, measure, the current central estimate of the NAIRU is a bit higher than the authors estimate it was in 2014.    But the rather bigger concern is probably the extent to which over 2008 to 2015, the estimated NAIRU on this model seems to jump around so much with the actual unemployment rate.   Again, the authors offer no thoughts on why this is, or why the pattern looks different than what we observed in the first half of their sample.  Is there a suggestion that the model has trouble explaining inflation with the variables it uses, and thus all the work is being done by implicitly assuming that what can’t otherwise be explained must be down to the (unobserved) NAIRU changing?   Without more supporting analysis I just don’t find it persuasive that the NAIRU suddenly shot up so much in 2008/09.   For what it is worth, however, do note that the actual unemployment rate was well above the NAIRU (beyond those grey confidence bands) for years.

Here is what the picture looks like when both sets of estimates are shown on the same chart.

nairu x2

On one measure, the NAIRU fell during the 08/09 recession, and on the other it rose sharply.  On one measure the NAIRU has been steadily rising for several years, while on the other it has been jerkily falling.  No doubt the Bank would like you to focus on the end-point, when the two sets of estimates are very close, but the chart does have a bit of a “a stopped clock is right twice a day” look to it.   When the historical estimates coincide it seems to be more by chance than anything else, with no sign of any consistent convergence.

I noted the end-point, where the two estimates are roughly the same.  But end-points are a significant problem for estimating these sorts of time-varying variables.  The authors note that in passing but, somewhat surprisingly, they give us no sense of how material those revisions can be, and have been in the past.  I went back to the authors and asked

I presume you’ve done real-time estimates for earlier periods, and then checked how  –  if at all –  the addition of the more recent data alters the estimates of the NAIRU for those earlier periods, but if so do you have any comments on how significant an issue it is?

To which their response was

An assessment of the real-time properties of the NAIRU and the implied unemployment gap was beyond the scope of our paper.

Which seems like quite a glaring omission, if these sorts of model-based estimates of a time-varying NAIRU are expected to play any role in forecasting, or in articulating the policy story (as the Governors did in February).

As it happens, the Reserve Bank of Australia published a piece on estimating NAIRUs etc last year.  As a Bulletin article it is a very accessible treatment of the issue.   The author used the (reduced form) Phillips curve models (of the sort our Reserve Bank used in the first chart above).

nairu rba

The solid black line is the current estimate of Australia’s NAIRU over the whole of history.  But the coloured lines show the “real-time” estimates at various points in the past. In 1997 for example (pink line) they thought the NAIRU was increasing much more –  and thus there was less excess labour market capacity –  than they now think (or, their model now estimates) was the case.  In 2009 there was a stark difference in the other direction.  Using this model, the RBA would have materially underestimated how tight the labour market actually was.

It would be surprising if a comparable New Zealand picture looked much different, but it would be nice if the Reserve Bank authors would show us the results.   These end-point problems don’t mean that the model estimates are useless, but rather that they are much more useful for identifying historical NAIRUs (valuable for all sorts of research) than for getting a good fix on what is going on right now (the immediate policy problem).    That is true of many estimates of output gaps, core inflation (eg the RB sectoral core measure) and so on.

Having said that, at least the Australian estimates suggest that Australia’s NAIRU has been pretty steadily falling for the last 20 years or so, with only small cyclical dislocations.  Quite why the Reserve Bank of New Zealand’s Phillips curve models suggest our NAIRU has been rising –  when demographics and welfare changes typically point the other way –  would be worth some further examination, reflection, and commentary (especially if Governors are going to cite these estimates as more or less official).

Comparing the two articles, I noticed that the RBA had used a measure of core inflation –  their favoured measure, the trimmed mean –  for their Phillips curve estimates, while the RBNZ authors had used headline CPI inflation (ex GST).  Given all the noise in the latter series – eg changes in taxes and government charges –  I wondered why the authors didn’t use, say, the sectoral factor model estimate of core inflation (the Reserve Bank’s favoured measure).  It would be interesting to know whether the NAIRU results for the last half decade (when core inflation has been very stable) would be materially different.  It might also be worth thinking about using a different wages variable. The authors use the headline LCI measure, as a proxy for unit labour costs. But we have actual measures of unit labour costs (at least for the measured sector), and the authors could also think about using, say, the LCI analytical adjusted series and then adjusting that for growth in real GDP per hour worked (a series that has itself been revised quite a bit in the last year).  No model estimate is going to be perfect, but there does seem to be some way to go in refining/reporting analysis research in this area.

I have argued previously that the Reserve Bank should be required to report its estimates of the NAIRU, and offer commentary in the MPS on the contribution monetary policy is making to closing any unemployment gaps.   I’d have no problem with the Bank publishing these sorts of model estimates, but I’d have in mind primarily something a bit more like the Federal Reserve projections, in which the members of the (new, forthcoming) statutory Monetary Policy Committee would be required to publish their own estimates of the long-run sustainable rate of unemployment that they expect the actual unemployment rate would converge to (absent new shocks or structural changes).  The individual estimates are combined and reported as a range.  No doubt those individual estimates will have been informed by various different models, but in the end they represent best policymaker judgement, not the unadorned result of a single model (end-point) problems and all.

And finally, the Reserve Bank (aided and abetted by the Board) has always refused to concede it made a mistake with its (eventually reversed) tightening cycle of 2014 –  sold, when they started out, as the beginning of 200 basis points of increases.  The absence of any emphasis on the unemployment rate, or unemployment gaps, was part of what got them into trouble.  In the latest research paper there is a chart comparing the Bank’s current estimates of the NAIRU (see above) with their current estimates of the output gap.

nairu and output gap

The tightening cycle was being foreshadowed in 2013, it was implemented in 2014, it was maintained well into 2015.  And through that entire period, their unemployment gap estimates were outside the range of the output gap estimates.

We don’t have their real-time estimates of the unemployment gap, but we do have their real-time output gap estimates.  They might now reckon that the output gap in mid 2014 (blue line) was still about -1 per cent but in the June 2014 MPS they thought it was more like +1.5 per cent.

output gap from june 2014 mps

The failure to give anything like adequate weight to the direct indicators of excess capacity from the labour market (ie the unemployment rate and estimates of the NAIRU) looks –  as it felt internally at the time – to have contributed materially to the 2014 policy mistake.

(In this post, I’m not weighing into the specific question of what exactly the level of the NAIRU is right now, and the Bank does emphasise that there are confidence bands around its specific estimates, but I’m aware that is also possible to produce estimates in which the current NAIRU would be 4 per cent or even below.)

The Reserve Bank’s McDermott again

Earlier in the week I wrote about Reserve Bank chief economist John McDermott’s rather strange attempt to distract attention from the Bank’s own GDP forecasts –  which some had suggested were a bit optimistic –  by suggesting that private bank economists didn’t understand the process the Reserve Bank used, and even using the word “nonsense” in an attempt to bat away what seemed like quite legitimate questions.   Somewhat to my (pleasant) surprise, Westpac  – one of the banks that had questioned the Reserve Bank’s forecasts – actually went public in response , although being an institution regulated by the Reserve Bank they still seemed to feel the need to express due deference to the powerful, ending their note this way, (emphasis added)

We are comfortable respectfully maintaining that difference of opinion.

After each Monetary Policy Statement the Reserve Bank’s senior staff fan out across the country to do a series of post-MPS presentations (I used to do some of them myself).   These events are all hosted, and paid for, by the commercial banks, and commercial clients of those banks are the invited guests.  It is an arrangement that is convenient for the Reserve Bank –  the banks rustle up an audience –  but which has always seemed a bit questionable to me: preferential access to senior public officials, on sensitive policy issues, for the invited clients of particular banks.  The tone and thrust of questioning might be a little different if some such occasions were hosted by the Salvation Army or unemployed worker advocacy groups.

These occasions are supposed to be off-the-record, whatever that means.  The Bank defends it on the basis that it is supposed to let them speak more freely.  But the reason people turn up is to garner information and perspectives from –  and ask questions of – senior public officials.  And no one supposes that financial markets people in the room don’t (a) use, and (b) pass on to clients anything interesting, any different angles, that are raised when the Governor (in particular) and his leading offsiders are talking.     As I’ve noted previously, the contrast with the Reserve Bank of Australia is striking: senior officials will give speeches to private audiences, but the standard practice is, wherever possible, to post the text of the address and a webcast or audio of the address and any question and answer sessions, to minimise the extent to which some have access to Reserve Bank information/views others don’t have.

After my post the other day, a reader who had been at the post-MPS presentation John McDermott had given last Friday got in touch to pass on some of what McDermott had said there.  My reader felt –  and based on his report I agree –  that they didn’t put this senior official, or the Reserve Bank, in a particularly good light.   The reports are secondhand (ie I wasn’t there), so I’m relying on my reader to have captured the thrust of what McDermott said reasonably accurately.  But having worked closely with McDermott in the past, what I read had a ring of authenticity to it.   My reader has given me explicit permission to quote from the email I was sent.

He spent the first five minutes of his short presentation defending their record by displaying a chart showing CPI, broken down into tradables and non-tradables components, over the last 50 years or so. Essentially he was highlighting how insignificant the recent deviations from target look when you compare it to the extreme volatility in prior, pre-OCR, decades. He also claimed the RBNZ can only influence the non-tradables component and was rather self-congratulatory in how well they had done there.

Something didn’t sound quite right about that (the tradables vs non-tradables breakdown doesn’t go back that far), so I asked the Bank for a copy of McDermott’s slides (which, legally required to respond as soon as reasonably practicable, they supplied within 24 hours).    In fact, this paragraph was summarising two slides.  The first is, from memory, one of McDermott’s favourites.

mcdermott 1

In the 70s and 80s inflation was very high and volatile, and for the last 25+ years it hasn’t been.  It is a worthwhile point to make from time to time, but doesn’t have much bearing on anything to do with how monetary policy should be run right now (a bit looser, a bit tighter or whatever).  Apart from anything else, almost every advanced country could show a similar, more or less dramatic, chart.    And in the earlier decades, inflation wasn’t being targeted –  until 1985 the ‘nominal anchor” was the (more or less) fixed exchange rate.

The second chart was this one

mcdermott 2

This is presumably what McDermott was talking about when, as my reader reported,

He also claimed the RBNZ can only influence the non-tradables component and was rather self-congratulatory in how well they had done there.

There is no doubt that, in the short-term, the Reserve Bank is a pretty minor influence on tradables inflation, which is thrown round quite a bit, and most obviously, by fluctuations in petrol prices (changes in which closely track international oil prices) and the influence of weather events of fresh food prices.   The Reserve Bank can’t do much about those, and is specifically instructed (in every PTA) not to focus on them.  Of course, in the very short-term the Reserve Bank can’t do much about non-tradables inflation either –  it is quite persistent (ie not very volatile), and inflation right now is a response to monetary policy choices from perhaps 18 months ago, and economic forces (often hard to forecast) from the last year or so.

But it would be nonsense to suggest (if in fact McDermott did) either that tradables inflation is outside the Bank’s influence, or that the track record on non-tradables inflation is just fine.   New Zealand can’t do anything much about the world price of tradables, but monetary policy is a direct influence on the exchange rate, and thus on the New Zealand dollar price of tradables.    That can’t sensibly produce a stable tradables inflation rate quarter to quarter, but it can (and does) have a material influence on the trend –  “core tradables inflation” if you like.     And McDermott’s chart seems deliberately designed to avoid focus on the fact that, over time, tradables tend to inflate less rapidly than non-tradables.  As I’ve noted previously, the rule of thumb around the Bank used to be that if one was targeting 2 per cent inflation, that might typically involve something nearer 1 per cent tradables inflation and something nearer 3 per cent non-tradables inflation.

As it happens, the Reserve Bank produces estimates (from its sectoral factor model) of core tradables and core non-tradables inflation.  I ran this chart of those data a few weeks ago

sec fac model jan 18

Not only is this estimate of core tradables inflation not terribly volatile, but the gap between the two series isn’t unusually large or small.  Overall (core) inflation has simply been too low to be consistent with the target set for the Reserve Bank.  There isn’t anything for current Reserve Bank management to be proud of.

One of the reforms the new government is promising is the addition of some sort of employment objective (non-numerical) to the Bank’s statutory monetary policy responsibilities.  We don’t know the details, and probably neither does the Bank –  The Treasury was accepting submissions on that point right up to today – but I presume we will get a hint when the Policy Targets Agreement with the new Governor (under existing legislation) is signed and released next month.   But it is an obvious area of interest and apparently McDermott was asked some questions about the new environment.   You may recall that in the MPS the Bank released, for the first time, an estimate of the NAIRU (the estimated rate of unemployment at which there is neither upward nor downward pressure on inflation from the labour market) – “released”, but in a footnote (repeated in the press conference), citing analysis in an as-yet-unpublished research paper.

My reader reports that McDermott was asked about this, including

whether their estimate of NAIRU came about as a result of the likely addition of an employment mandate to the PTA, and … how they went about coming up with that number. His initial reply was “I’ve got a lot of very smart people working for me” and then he went on to basically say that the analysis and maths involved are too complicated for us to understand. He also highlighted, to the point of seeming rather proud of, the fact his team had decided to come up with the estimate on their own accord without any suggestion from him. It didn’t seem to me that even he knew how they  came up with 4.7%, nor that he particularly cared much.

The final sentence is clearly editorial in nature, and may or may not represent McDermott’s actual view, although it was clearly how he came across to this particular member of his audience.     As for the rest, when you put out a number in a footnote, don’t simultaneously make available the workings and background research, fall back on “very smart” staff,  and won’t even attempt to explain the intuition of the work that has been done, it isn’t a particularly good look from a senior public servant.    (I’ve also heard that in fact the “acting Governor” had been all over staff, as a matter of urgency, to produce publishable estimates of the NAIRU.)

I’m still looking forward to seeing the research paper when they finally get round to publishing it.  Perhaps the 4.7 per cent estimate of the NAIRU (with confidence bands) will prove to be robust, although it seems implausibly high to me.  But it is worth remembering that the Bank has form when it comes to rushing out new labour market indicators in high profile documents endorsed by senior managers, that play down any notion of ongoing excess capacity, without having first adequately road-tested and socialised the background research.    Persevering readers may recall the saga of LUCI , touted a couple of years ago by a Deputy Governor as the latest great thing, allegedly demonstrating that the labour market was already at or beyond capacity (and at least in that case the associated Analytical Note had already been published), before the interpretation of the whole indicator was quietly changed, and then it disappeared from view.

The questioner of McDermott apparently continued and

….suggested NAIRU will presumably become a more important consideration for the Bank going forward if they are handed a ‘full-employment’ mandate but he didn’t really address that question and instead spent 5 minutes explaining why it would need to be the Bank, and not politicians, who define what full-employment means at any given time, a suggestion I wasn’t aware anyone had made otherwise. He pressed the point that he didn’t believe the change to the mandate would make any difference whatsoever and sarcastically pointed out that they already consider employment when making decisions.

Since neither we, nor McDermott, has seen the new mandate, and since the new Governor (not yet in office) will be the single legal decisionmaker for a time, and then the new statutory Monetary Policy Committee will take responsibility, it isn’t clear how or why McDermott thinks he can say with any confidence that a new mandate won’t make any difference to policy.  Perhaps he wishes it to be so, but then he has been one of key figures in the regime of the last six-plus years that has delivered core inflation consistently below target even while (even on their own estimates) the unemployment rate has been above the NAIRU for almost the whole of that time.     As reported, it didn’t seem a very politically shrewd answer either –  it is one thing to emphasise that (as everyone agrees) in the long-run monetary policy can only influence nominal things (price levels, inflation rates etc), and quite another to suggest that there aren’t legitimately different short-run reaction functions.

We deserve better from our operationally independent central bank. Lifting the quality, and authority, of the Bank’s work around monetary policy will be one of the challenges for the new Governor, and needs to be borne in mind too by those devising the details of the new Reserve Bank legislation.

Expecting more inflation?

The results of the Reserve Bank’s quarterly survey of expectations were released yesterday (in a curious change of timing, the Bank now collects the data before the Monetary Policy Statement, but doesn’t release it until a few days afterwards).

There wasn’t a great deal of interest in the headline numbers, except perhaps for a pretty large increase in the extent to which respondents (all 56 of them) think that monetary conditions are very easy at present: a net 64.3 per cent think conditions are more relaxed than neutral (45.7 per cent three months ago), more than at any point in the 30+ years the question has been asked.   There was also a pretty big change, in the looser direction, in expectations about future monetary conditions.   I’m not quite sure what led to that reassessment.    One obvious candidate might have been the surprise in the most recent CPI but, as it happens, there isn’t much change in the headline inflation expectation numbers.  Perhaps the answer doesn’t really matter that much, but it would still be interesting to know why a bunch of able people have change their assessment quite that much this quarter.

Once upon a time the Reserve Bank’s two-year ahead measure of average inflation expectations lined up pretty well with trends in core inflation.    In this chart, I’ve shown it plotted against the sectoral factor model measure of core inflation, the Reserve Bank’s preferred indicator.

expecs and core inflation feb 18

Notice that I used the term “lined up”.  In this chart I’ve simply shown expectations as surveyed in a particular quarter (but about outcomes two years ahead) and core inflation outcomes in that particular quarter.  If one does the chart with the expectations numbers shifted two years ahead (to tie up with the date the survey actually asks about) the relationship is a bit weaker.

The Reserve Bank used to use this two year ahead measure as a proxy for how wage and price setters – and, at least notionally, borrowers and lenders – took account of inflation: these numbers directly influenced the base inflation forecasts.  They’ve since moved away from that.  But my interest today isn’t so much the Bank’s own forecasts, but the answers to the expectations questions themselves.   Why, for example, have so many otherwise able people gone on predicting that (core) inflation would be around 2 per cent when it has actually kept on coming in at 1.3 to 1.5 per cent?   Perhaps part of the story is “laziness” –  if the Reserve Bank, with all its analytical resources, keeps telling the public core inflation will be getting back to 2 per cent perhaps respondents (mostly busy people) just take them at their word?  If so, perhaps there is a troubling possibility that we might be a little better off if the Bank didn’t publish (consistently wrong) projections.   Perhaps the answer is more ‘ideological’ –  the deep conviction, shared by so many, that current conditions are ‘abnormal’, must soon “normalise”, and therefore (almost by construction) inflation must soon get back to target?   Whatever the answer, at present the results of the survey seem to tell us more about the respondents than about the actual outlook for inflation.

The focus of analysis is on the mean (average) expectation, because that is the data the Reserve Bank makes readily available.  But there is a richer array of data behind the headline, some of which the Bank sends out in a quarterly report to the respondents to the survey (of whom I’ve been one for the last couple of years).   There is a median expectation –  in some ways, in principle, a more useful measure than the mean, although over the last few years there have not been any interesting differences.  But they also provide information on the highest single expectation, the lowest single expectation, and the upper and lower quartiles.  I only have the data for the period since I’ve been a respondent (but it would be good if the Bank would make the data, for this and other questions, more generally available on their website).

Typically, there has been a range of about 1.5 percentage points between the highest and lowest individual expectations.  If one looks at the actual variance in the core inflation series (chart above) that doesn’t unreasonable: economists (on average) never successfully forecast recessions, and probably don’t do that well on the surges or slumps in core inflation either.  For what it is worth, here is a chart showing the highest and lowest two-year ahead inflation expectations, and I’ve shown my own survey responses as well.

min and max

I was a little surprised at how much the minimum expectations had increased  (and perhaps at how low they got in 2016), but there has also been a visible step up in the maximum expectations.   As for my expectations, I was a bit surprised to find that my expectations were the lowest of all 50 respondents in two of the last three surveys.  It doesn’t greatly trouble me –  my forecast methodology at present is that after seven years of very low and stable core inflation it needs something out of the blue (eg the Reserve Bank finally getting the right model, and attitude) to make me think things will be very much different two years from now than they’ve been for the past seven –  but it is an interesting reflection of where crowd opinion (the semi-expert) version has moved to.   If we end up with core inflation still hovering around 1.3 to 1.5 per cent, almost every single respondent to this survey (which includes many of the prominent market economists) will have been surprised.  In fact, right now even the lower quartile response is 2.0 per cent –  a (core) inflation number the Reserve Bank hasn’t managed to achieve for eight years now.   Perhaps respondents will be proved right –  there is certainly a growing tide of sentiment globally picking a return of inflation (and really reckless fiscal stimulus in the US will help, for now, in the world’s largest economy) –  but it would be a turn up for the books if they were.

And I’m at least a little comforted in my own random walk (core inflation will be –  best guess –  what it has been) expectation, by the numbers thrown up by people actually putting money on these things.   I showed this chart a few weeks ago –  the gap between our 10 year conventional government bond and the two closest inflation-indexed bonds.


Nothing in those implied expectations suggests we are about to see a material change from the sorts of outcomes over this decade to date.  Half-way between those two lines, and the latest breakeven inflation number is about 1.4 per cent –  coincidentally (or perhaps not entirely) the current sectoral core factor model inflation rate).

Here is the same chart for the United States, from the St Louis Fed’s FRED database.

breakeven fredgraph

The  short-term patterns are pretty similar –  as you might expect, since there clearly are some common global forces at work –  but the levels are now quite different.    The market seems to expect US CPI inflation (not the variable the Fed targets) to average around 2 per cent over the next decade.

But not here.

Some Anglo labour markets

Having suggested yesterday that it might be time to think about cutting the OCR, or at least firmly committing to not raising it unless or until core inflation has already risen close to 2 per cent,  I was reflecting a bit on the handful of countries in which the central bank has raised policy interest rates, in particular Canada, the UK, and the United States.

In the UK case, one could almost discount the single increase, which really only reversed the cut put in place in the climate of heightened uncertainty after the Brexit referendum.   But in Canada and the United States there have been several increases –  in Canada, the policy rate is now 1.25 per cent, up from a low of 0.5 per cent, and in the United States, the Federal funds rate target is 1.25 percentage points off the lows.    In Canada’s case, there has even been signs of a sustained increase in core inflation, although in neither country is core inflation yet at target.

One material difference, if one contrasts New Zealand and Australia on the one hand, and the UK, Canada, and the United States on the other, is spare capacity in the labour market.  Since institutional features (labour regulations, welfare entitlements etc) vary from country to country –  affecting the “natural” rate of unemployment – one can’t take much from simple cross-country comparisons of unemployment rates.   But I’d noticed a headline suggesting Canada’s unemployment rate –  at 5.7 per cent –  was the lowest it had been in decades, and wondered how that comparison looked for the other countries.

Current unemployment rate Minimum since 1986
Australia 5.5 4.1
Canada 5.7 5.7
New Zealand 4.6 3.3
United Kingdom 4.2 4.2
United States 4.1 3.9

Like Canada, the UK also now has an unemployment rate that is the lowest in decades (I started the comparison from 1986 when the New Zealand HLFS started).   The United States unemployment rate is getting close to to the multi-decade low.   But in both Australia and New Zealand, the unemployment rates are well above the 30+ years lows.  Perhaps not very surprisingly, core inflation is weak in both countries  – the December quarter data for Australia are out tomorrow, but in September, the trimmed mean inflation rate was 1.8 per cent, against a target midpoint of 2.5 per cent.

Why these five countries?   Mostly, because all five have (a) data going back thirty years or more, and (b) have had floating exchange rates pretty consistently (the UK had three years in the European Monetary System).   Countries that had fixed exchange rates in the past often had bigger fluctuations in their unemployment rates.

Of course, even this comparison could be overly simplistic.  After all, labour market regulation etc can, and does, change over time, as do things like welfare benefit/work test regimes.  But over 30 years, both the New Zealand and Australian labour markets are generally regarded as having had more policy liberalisation than many other advanced countries.  Our minimum wage policy may be a partial exception, although even there we aren’t alone –  the UK, for example, has moved from having no national minimum wage to an increasingly binding (high) one.

And one area suggesting that our “natural” rate of unemployment (or NAIRU) might have been trending down more than in other countries, is the increased participation in the labour force of people 65 and over.  The OECD data only start in 2000, but here is how things have changed.

Labour force participation rate, age 65+
2000 2016
Australia 6.0 12.6
Canada 6.0 13.7
New Zealand 7.7 23.4
United Kingdom 5.3 10.7
United States 12.9 19.3

New Zealand’s participation rate for old people has increased far more than those of these other Anglo countries. And since the unemployment rate for this age group in New Zealand is a mere 1.2 per cent, almost arithmetically a rising share of the labour force made up of an age group with a very low unemployment rate will tend to lower the average unemployment rate, and the NAIRU.    Our NZS system is structured to provide a near-universal modest welfare benefit, but impose no penalty on those who continue to work.   If an old person loses their job, they face less immediate pressure to find a new one (than, say, a 21 year old), and it isn’t surprising then that the unemployment rate for that age group –  a rising share of the labour force –  is so low.

I wouldn’t want to base any strong conclusions on these simple comparisons, but when you hear talk of some other central banks modestly raising interest rates, remember that conditions aren’t the same from the country to country, and that in New Zealand (and Australia) not only is core inflation persistently low, but there is little sign of any intense pressure on capacity in the labour market.

Inflation is the Reserve Bank’s responsibility

Late last week Statistics New Zealand released the latest quarterly inflation numbers.  For years, the Reserve Bank –  explicitly charged with the job –  has told us inflation is heading back to settle around two per cent.  If anything, most market economists have been even more of that view –  typically their forecasts of inflation and/or interest rates have been higher than those of the central bank. Indeed, on the very morning the CPI numbers were to be released one prominent market economist was reported in the Herald as picking that the Reserve Bank would be –  indeed, should be – raising the OCR as early as July.

But for years, the Reserve Bank has been consistently wrong.  The year to December 2009 was the last time their preferred measure of core inflation was at 2 per cent, the midpoint of the target range (a goal explicitly highlighted in the 2012 to 2017 Policy Targets Agreement).  And for six full years now that sectoral factor model measure of annual inflation has been between 1.3 and 1.5 per cent.  There is almost nothing in any New Zealand data suggesting any sort of sustained lift in New Zealand’s inflation rate.

There isn’t much in the rest of the advanced world taken as a whole either.  Here is the median rate of CPI (ex food and energy) inflation for the OECD countries/regions with their own currencies.

CPI ex OECD jan 18

There is plenty of wishful thinking –  among some central bankers, and some market economists –  but not much sign of more inflation, even in the handful of countries where central banks have raised interest rates a bit.

Led by the Reserve Bank, a lot of the commentary in New Zealand would have you believe that if there is an issue with low inflation in New Zealand, it is all about tradables inflation –  ie inflation in things we import, or produce in competition with the rest of the world.    The implication often is that if we just focus on domestically-generated inflation, there isn’t an issue.   But mostly that looks like an attempt to muddy the water and avoid responsibility.

Here is one way of looking at that issue.   In calculating the sectoral factor model of core inflation, the Reserve Bank actually calculates (and now publishes) separate estimates of tradables and non-tradables core inflation (that’s why it is called the “sectoral” model).   In this chart, I’ve shown both those measures and –  the bars –  the gap between the two of them (non-tradables less tradables).

sec fac model jan 18

The gap between the two series –  the extent to which core non-tradables inflation exceeds core tradables inflation –  is actually a bit less than average at present.

In looking at the chart, there are perhaps two other things worth bearing in mind.

  • the core tradables measure is influenced by developments in the exchange rate (as one would expect) –  see the surges in 2001 and 2009 after the sharp falls in the exchange rate, and the dip in 2004 after the sharp rise.  It is a reminder that although we can’t control world prices for the stuff we import, New Zealand dollar tradables inflation is directly influenced by New Zealand monetary policy choices (as they affect the exchange rate), and
  • the gap between core non-tradables and core tradables is somewhat cyclical.  The peaks in the gap coincide with the periods of sustained pressure on domestic resources (as measured, eg, by the Reserve Bank’s output gap estimates).    Perhaps unsurprisingly when, as at present, output gap estimates are around zero, and the unemployment rate has still been above NAIRU estimates, the gap between the two sectors’ core inflation rates is pretty subdued.

And, of course, there is little or no sign in the chart of any sustained pick-up in core non-tradables inflation, the bit most directly responsive to New Zealand economic circumstances.  And don’t be fooled by the fact that core non-tradables is itself above 2 per cent:  non-tradables typically inflate faster than tradables, and if overall core inflation is to be kept near 2 per cent, core non-tradables inflation would typically have to be around 3 per cent.   It isn’t, and hasn’t been for years.

This chart has another of my favourite series: SNZ’s measure of non-tradables excluding government charges and cigarettes and tobacco (now heavily affected by rising taxes).

dom inflation

I’ve also shown the “purchase of housing” component of non-tradables inflation –  largely construction costs.    Non-tradables inflation, ex taxes and government charges, did pick up a bit (as one might expect) when construction cost inflation was surging (back in 2013, and in 2015/16), but (a) the peaks seem to have passed, and (b) this particularly proxy for core non-tradables inflation is now rising at less than 2 per cent per annum.

Finally, there isn’t much sign that people are really expecting inflation will soon settle back to, and stay around, 2 per cent.   The Reserve Bank’s Survey of Expectations will be out next week, and it will be interesting to see what respondents write down for their expectations five to ten years ahead (with a new government and a new Governor, but an uncertain mandate and unknown committee still to come).    When I filled in the form the other day, I wrote down something like 1.75 per cent.  But perhaps I was too optimistic?    There are, after all, market transactions going on where people take a view –  actual or implicit –  on what average future inflation will be, as people buy and sell government bonds (conventional and inflation indexed).

The gap between indexed and conventional bonds isn’t a perfectly clean read on inflation expectations –  but then neither is any other measure.   But here is what the data shows, using the Reserve Bank’s data for 10 year conventional government bonds (a rolling horizon) and the indexed bonds maturing in 2025 and 2030.

iib breakevens jan 18

At the start of the period, the 2025 bond was nearer to a 10 year maturity, while these days the 2030 bond is nearer 10 years.  And whereas implied expectations of average future inflation were close to 2 per cent four years ago (the start of the chart), now they seem to be only around 1.35 per cent.    As a reminder, the Reserve Bank’s sectoral core factor model measure of inflation is currently 1.4 per cent, and has been in a range of 1.3 to 1.5 per cent for years.     As expectations, the implied market numbers don’t seem irrational at all.

Why does it all matter?  After all, 1.5 per cent isn’t really that far from 2 per cent.  I think there are three reasons:

  • first, the Reserve Bank undertook to keep (core) inflation near 2 per cent, and not only hasn’t done so, but doesn’t have a compelling explanation for their failure, in the area they are supposed to be most expert in,
  • second, the lost opportunities.   Economic growth over the period since the last recession hasn’t been particularly strong, and the unemployment rate has been consistently above credible estimates of a “natural” non-inflationary level.   Monetary policy that had been run a little looser not only would have delivered inflation nearer target, but would have allowed some (modest) real economic gains as well,  In particularly, some of those unemployed –  who most monetary policy commentators seem not to care much about –  would have been back in jobs sooner, and even now the unemployment rate could have been lower, and
  • third, when the next recession comes many countries are going to be in considerable difficulty because they can’t cut interest rates very much at all.    Our problem isn’t as severe as that in some countries, but it is hardly a trivial issue either (given that the Reserve Bank cut the OCR by 575 basis points in the last recession).  The best contribution the Reserve Bank can make to miminising that threat is to get inflation back up to –  perhaps even a bit above –  target, and keep it there.  By doing so, expectations of higher inflation will underpin higher average nominal interest rates.

Much of the problem in recent years has been that the Reserve Bank has been operating with the wrong model.    In particular, we’ve heard repeated claims from the (previous) Governor that monetary policy was extraordinarily stimulatory, and repeated talk about “normalising” interest rates.  How much better if our Reserve Bank –  with more policy flexibility than many of their northern hemisphere peers –  had been willing to declare themselves genuinely agnostic about what was going on with neutral or “natural” interest rates, and been willing to focus –  with real intent –  on doing whatever it takes to get and keep core inflation back to, or perhaps a little above, 2 per cent.     Caution might have been excusable in the immediate aftermath of the last recession, but after years of persistently low domestic inflation, it looks like indifference –  which really should be inexcusable.

I saw the other day an article which seemed to suggest that the new Governor’s job (and that of his forthcoming statutory committee) just got harder.  To the contrary, it is even clearer now than it was a few quarters ago that if it is time for anything, it is time at last to take a few risks on getting, and keeping, core inflation back to target.


OCR cuts as plausible as increases

The CPI data for the September quarter were released yesterday.  They were the last for the period Graeme Wheeler was Governor of the Reserve Bank –  charged with targeting inflation – although of course the lags mean that policy choices Wheeler made will still be influencing inflation through next year.    The target Wheeler willingly signed up for five years ago was 2 per cent CPI inflation.  In his time in office, he saw annual inflation that high only once (of 20 observations).  On his preferred core measure –  which is probably the best indicator of the underlying trend in inflation –  September 2009 was the last time core inflation was as high as 2 per cent.

In fact, here is that (sectoral factor) measure of core inflation back a decade or so.

core inflation

There are various readings one could put on that chart.  On the one hand, core inflation (on this measure) has been astonishingly stable in the last six years or so.   That would normally be to the credit of the Governor concerned.   Then again, the same Governor explicitly signed up for a focus on 2 per cent inflation, and there has been no sign that the trend in inflation is any closer to fluctuating around 2 per cent than it was in 2012.

On the other hand, at the start of chart, back in 2006/2007 at the peak of the last boom, inflation was clearly too high (relative to the target the government had given us).   Partly for that reason, I continued to recommend OCR increases throughout most of 2007.  With hindsight –  but probably only in hindsight – those increases weren’t needed.  But my point here is to recognise that the gap between actual core inflation and the target midpoint (2 per cent) was materially larger then that it is now.  As it happens, we didn’t have this particular core measure in 2007, but when we sat around the table debating what Alan Bollard should do with interest rates then, we knew a best estimate of core inflation was around 3 per cent (we were also pretty confident that the unemployment was well below a sustainable level).  In fact, at the time the Bank’s Board was asking uncomfortable questions as to quite how 3 per cent annual core inflation squared with the statutory mandate of “a stable general level of prices” (I wrote a, from memory, slightly casuistical paper in response.)

So, if there are legitimate questions about the conduct of monetary policy right now –  the Bank having already undone its 2014/15 mistake –  they pale in comparison with those that should have been being asked in 2007.  (As I recall it, Stephen Toplis was raising such questions then, and attracting the ire of the then Governor).

What do yesterday’s inflation data show?

I’ve previously shown a table of six core inflation measures

Core inflation, year to Sept
CPI ex petrol 1.8
Trimmed mean 2
Weighted median 2
Factor model 1.8
Sectoral factor model 1.4
CPI ex food and energy 1.5

A couple of those measures are actually bang on 2 per cent.  On the other hand, the Reserve Bank has been consistently clear in recent years that its favoured measure is the sectoral factor model (a statistical exercise that searches of underlying common trends in the disaggregated components of the CPI), and international comparisons often use a CPI ex food and energy measure (it is the one core measure the OECD reports for its member countries).

Hawks might be inclined to dismiss the Bank’s preference for the sectoral factor model as just “cover for a reluctance to raise the OCR to where it ‘should’ be”.  I think they would be wrong to do so.  It isn’t that long since the median core inflation measure was running materially below the sectoral factor model number, and the Bank was then asserting that the core inflation measure was a better guide.   I wasn’t fully convinced at the time, but it seems that they were probably right.

We only have consistent data for all six core measures back three years or so, but even that is enough to illustrate the point.  In this chart I’ve shown the sectoral core measure and the median of the other five measures.

core inflation measures oct 17

The gap between the two lines was larger a couple of years ago than it is now.  I don’t think many observers will find it that credible that in the sort of economy we’ve experienced in the last couple of years “true” core inflation has picked up as strongly as the blue line suggests.  The general understanding of how inflation works, in settled and stable economies, is that there is lots of short-term noise, but that the underlying trend –  the bit monetary policy should usually focus on –  is pretty sticky and slow-moving.   Personally, I find it more convincing to believe that core inflation has been pretty consistently low for several years than to suppose it has gone through the quite large cycles some of the other measures suggest.  In support of this proposition, over the almost 25 years for which we have estimates from the sectoral factor model, it is easy –  with hindsight –  to tell a persuasive story about what was going on in that series.  Less so with some of the other measures.

One other way to illustrate the point is to compare the sectoral factor model numbers to a couple of the other core inflation indicators for which there is a long run of data.    This compares the sectoral factor model and the factor model (an earlier iteration, using a similar class of filtering techniques).

core measures

Or in this one a comparison of the sectoral factor model with the CPI ex food and energy (in the latter I haven’t manually excluded the 2010 GST spike).

core measures 2

You will struggle to find an economist who thinks that, in an economy like New Zealand’s, the underlying trend in inflation is anything like as noisy as those other measures suggest.

We don’t have a formal Policy Targets Agreement at present, but for some years now PTAs have included this phrase

For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which is the focus of the policy target.

There isn’t much sign either that the medium-trend of inflation is fluctuating around 2 per cent –  where it supposed to have been –  or that it has been increasing and getting any closer to target.

Here is another way of looking at the issue.   Headline inflation is thrown around by changes in taxes and government charges, and although SNZ don’t (unfortunately) publish a series of CPI inflation excluding taxes and charges (as many other countries’ statistical agencies do), they do publish a series of non-tradables inflation excluding government charges and the cigarettes and tobacco component (the latter having been the subject of repeated large tax increases in recent years, which have nothing to do with the underlying inflation process).  The data only go back 10 years or so, but here is what that chart looks like.

NT ex govt charges and tobacco oct 17

This measure of core non-tradables inflation is off its lows (in 2010, 2012, and 2015) but shows no sign of racing away.    Construction cost pressures play a big role in this series, but even with the pressures in that sector, this measure of non-tradables inflation is currently running at only around 2.25 per cent.   The 2014 peak was (a bit) higher. (Consistent with this story, wage inflation –  although quite high relative to productivity growth –  has also been showing no signs of acceleration).

I saw one commentary yesterday suggesting that if non-tradables inflation was above 2 per cent that was grounds for thinking about tightening –  after all, 2 per cent is the inflation target midpoint.  Actually, for decades non-tradables inflation has averaged well above tradables inflation.  Our benchmark in discussions at the Bank was often along the lines of “a 2 per cent inflation target means tradables inflation averaging about 1 per cent and non-tradables inflation averaging about 3 per cent”.  As it happens, for the 17 years the Bank has data on its website, tradables inflation has averaged 1.0 per cent, and non-tradables inflation has averaged 3.2 per cent (CPI inflation averaged 2.2 per cent).

If the Reserve Bank is serious about ensuring that core inflation fluctuates around  per cent, they will need to be seeing quite a lift in non-tradables inflation from here.  There is nothing in the data suggesting that lift is already getting underway.  And, of course, that is largely why their own projections haven’t shown any OCR increases for some considerable time.

Against this backdrop, the troubling question remains why every commentator (I’ve seen) has been focused on the timing of a potential OCR increase (even if all agree it is probably still some time away).    Core inflation is persistently below target, the best measure of core inflation shows little or no sign of picking up, and –  not irrelevantly – the unemployment rate is still above any credible estimates of the long-run sustainable rate.  It is not as if rapid productivity growth is driving prices downward either –  some sort of “good low inflation”.  Instead, there is no aggregate productivity growth.  And few commentators seem to envisage GDP growth (headline or per capita) accelerating from here.  Even if there are some encouraging signs in the world economy at present, it isn’t at all clear to me why one would think the next OCR change was any more likely to be an increase than a cut.

I wouldn’t be pushing for an OCR cut at present, but it isn’t hard to envisage how we might be better off if the OCR was a bit lower than it is now.   I’ve resisted the argument that house price inflation should be an additional factor in OCR decisions, and I’m not about to reverse that stance just because house price inflation is (temporarily?) subdued, but for those who did want to give house price inflation some extra weight even that argument against further OCR cuts probably has to be put to one side for now.

In conclusion, I noticed this paragraph in the BNZ commentary on yesterday’s numbers

What is peculiar to New Zealand, however, is the very confused governance picture we have at the moment. Not only do we have a caretaker governor but we also don’t know who the incoming government is or what its expectations are for future fiscal stimulus, the Policy Targets Agreement and the Reserve Bank Act itself. Until these questions are answered it is very difficult to make any meaningful comment on future RBNZ action with any degree of certainty.

I’d largely agree with all that. It remains possible that the Bank could be operating under a different PTA as soon as next week (it happened to varying degrees in each of 1990, 1996, 1999 and 2008), and even then the (unlawful) caretaker Governor has little or no effective mandate to do anything much, minding the store until a permanent appointee is in place.  Of course, even when all those uncertainties are resolved –  Governor, and any (or no) changes to the PTA or Act – it will still be hard “to make any meaningful comment on future RBNZ action with any degree of certainty”.   Doing so would require a degree of knowledge about future inflation pressures not gifted to central banks, or to private forecasters.  We (more or less) know what we see now, and not much beyond that (ever).




LVRs, interest rates and so on

I was recording an interview earlier this afternoon, in which the focus of the questioning was the Real Estate Institute’s call for some easing in the Reserve Bank’s LVR restrictions.

Of course, I never favoured putting the successive waves of LVR restrictions on in the first place.  They are discrimatory –  across classes of borrowers, classes of borrowing, and classes of lending institutions –  they aren’t based on any robust analysis, as a tool to protect the financial system they are inferior to higher capital requirements, they penalise the marginal in favour of the established (or lucky), and generally undermine an efficient and well-functioning housing finance market, for little evident end.  Oh, and among types of housing lending, they deliberately carve-out an unrestricted space for the most risky class of housing lending –  that on new builds.

That doesn’t mean I think it is remotely likely that the Reserve Bank will be easing the restrictions any time soon –  apart from anything else, it would leave their consultation paper on debt to income ratio restrictions looking a little silly.   Of course, it would be good if the Reserve Bank did lay out some specific criteria for lifting these ostensibly temporary restrictions, but with the toxic brew of rapid population growth and continuing land use restrictions in place, if I saw the world as they seem to, I wouldn’t be in a hurry to lift the restrictions either.

In any case, it isn’t that clear quite how large a role the LVR restrictions are playing in the reduction in sales volumes.   They must be playing a part, but so too will higher interest rates, and the apparent increase in banks’ own lending standards, and pressure through the parents from APRA (on the lending standards across the whole of Australian banking groups).  Which, of course, is also why it isn’t clear quite how much difference any easing back in the New Zealand LVR controls might make.  Some presumably, but even the Reserve Bank has never claimed that LVR controls would have a very large impact on house prices, or housing market activity, for very long.   And while I noticed an article this morning about negative equity, it is worth bearing in mind that, on the REINZ index (not using median prices), house prices have risen 65 per cent in the last five years, and are currently 0.6 per cent off their peak.

But what of interest rates?  A year ago, the OCR was 2.25 per cent, and today it is 1.75 per cent.  Thus, the Reserve Bank talks of having eased monetary policy.   Here are mortgage rates though.

mortgage ratesI don’t suppose anyone is taking out four or five year fixed rate mortgages, but across the entire curve, interest rates are higher not lower.   Or we could go back another year or so, to just prior to when the Reserve Bank began cutting the OCR.   The OCR has been cut by 175 basis points since then.   Even at the shortish end of the mortgage curve, rates are down only 50-70 basis points.

Having been reflecting this morning on Graeme Wheeler’s performance over his term, I had a look back at where interest rates were when Wheeler took office in September 2012.

mortgage rates sept 12Barely lower, even though core inflation –  on their own favoured measure – is as low today as it was then (and has been consistently low throughout his term).

I wondered if there were offsetting factors but:

  • Two year ahead inflation expectations are about 25 basis points lower than they were then (largely offsetting any reductions in nominal mortgage rates, to leave real rates little changed)
  • the TWI measure of the exchange rate is a bit higher than it was then,
  • the ANZ commodity price index, in inflation-adjusted world price terms, is hardly changed from what it was then.

Of course, the unemployment rate has fallen since September 2012, but there hasn’t been any sign of a pick-up in the best indicator of labour scarcity –  real wage inflation.

So, overall, it is a bit of a puzzle how the Governor expected to get core inflation back to fluctuating around the target midpoint without actually easing monetary conditions.  I don’t happen to agree with him on this one, but he keeps talking about how the huge migration inflows have reduced net inflation pressures (supply effects outweighing the demand effects).  If he really believes that it is even more puzzling that monetary conditions haven’t been eased.

I’m not sure how he’d respond.  But perhaps he could explain that too in the forthcoming speech.