Compass gone wonky

Having delivered his Monetary Policy Statement, done his press conference, fronted up to the Finance and Expenditure Committee –  oh, and roiled the markets –  Reserve Bank Governor appears to have jumped on a plane for a quieter couple of days at conference in San Francisco.  I don’t begrudge him that –  the conference in question is usually pretty good (I got to go once) and this year’s programme looked as interesting as ever.  The topic was “Monetary Policy Under Global Uncertainty”.

The Governor was on a “Policymaker’s Panel” –  along with a Deputy Governor from Korea and a former Deputy Governor from Brazil.    It can’t have been a very in-depth panel (the programme allowed only 50 minutes in total), but we don’t hear much systematic from the Governor on monetary policy and so it was welcome that he chose to release his short (four pages or so of text) remarks.  I don’t think I’ve seen them covered in the local media at all.    That is perhaps a little surprising as, having greatly surprised commentators and markets in two MPSs in succession, his remarks to this FRBSF panel were under the heading Monetary Policy: A Compass Point in Uncertain Times.   Sounds like a worthy aspiration.  Shame about the execution.

But what did Orr have to say in his brief remarks?

First, he attempts to suggest that policy (etc) uncertainty isn’t really much of an issue in New Zealand.  Yes, he really does claim that, drawing on a measure – of the dispersion of GDP forecasts –  which isn’t an indicator of policy uncertainty at all.    Now, no one is going to claim that we have anything like the degree of policy uncertainty they face in the UK (or, thus, its major trading partners including Ireland). We don’t even have a “trade war”.   Then again, we had months of uncertainty around capital gains taxes, ongoing uncertainty about the future labour market regulatory regime, and now about the future water pollution regime. Oh, and bank capital requirements…..to name just a few.

Then we come to paragraph that I agree with, quite strongly, and yet it seems he no longer does.   In the light of the uncertainty (globally) he tells us

it is vital that monetary policy acts as a compass point for decision making

going on to note

For New Zealand, this means setting policy to achieve our price stability target and support maximum sustainable employment. It means acting decisively to prevent an unnecessary worsening in economic conditions and the un-anchoring of long-term inflation expectations. And it means recognising the limits of monetary policy.

I’m not going to disagree, but quite how he justifies his MPC’s decisions, and communications, in and around both the August and November MPSs is less clear.  As I noted the other day, in August –  when they did act “decisively” there was little attempt to invoke arguments about inflation expectations in support, then we had a couple of months of wheeling out such arguments, only for them largely to be abandoned last week when he chose to err on the side of caution, “unnecessarily” so, at least in my view, against a backdrop of inflation and inflation expectations below targets with (in their own words) downside risks.   Not much of guiding light there.

Then we get the sort of paragraph beloved of self-important central bankers

In discussing these topics, I will touch on how, since the Great Financial Crisis, central banks have been tasked with a widened set of objectives. On one hand, we appreciate the constraints faced by other institutes, and the peril that may have resulted from the crisis had central banks not stepped up to the task. On the other hand, central banks are sometimes expected to solve phenomena that are structural in nature, and that do not sit easily within the conventional realm of monetary policy. At the Reserve Bank, we are always exploring new policy options to meet our broadened mandate.

Except that, typically, central banks don’t have a wider mandate how than they did before.  That is certainly true of New Zealand –  where nothing at all (in legislation) has changed around regulation/supervision, and where the change to the formal goal of monetary policy was, in the Bank’s own telling, more cosmetic than substantive, designed to capture something about the way the Bank had long sought to operate, while altering some rhetoric.  The big change in New Zealand has been central bankers looking to extend their own reach, both within and beyond the mandate Parliament has given them –  whether LVR limits (arguably within the letter of the law), focus on “culture and conduct” (clearly not),  the Maori strategy (not), the green agenda (largely not) and so on.    Perhaps in a few corners of the world there has been a belief, by a few people, that central banks can markedly change structural growth outcomes.   If so, such a mantra has rarely, if ever, been heard here in the last decade. But it makes central bankers feel important and valued to pretend otherwise.

Keeping on through the speech, we do actually get some recognition that “policy uncertainty” –  and “regulatory requirements” –  were acting as a barrier to business investment in New Zealand.  As he notes, most of this doesn’t have much to do with monetary policy, except that monetary policy needs to take account of whatever is influncing overall demand and supply pressures/balances.

From a central bank perspective, uncertainty has one clear impact: it makes our job harder. Good monetary policy depends on reasonable forecasts. High uncertainty makes forecasting harder. There is more noise in the data and forecasts are more subject to revision. A consequence of this is that the Official Cash Rate (OCR) may be less predictable simply because the world in which we are making our decisions is less predictable.

Except that earlier he showed that chart (mentioned above) in which the dispersion of GDP forecasts has been quite a bit lower than usual in the last couple of years.  So it might be a fair point in principle, but in practice –  in recent months –  the real source of short-term uncertainty about the OCR has been……the Reserve Bank itself.    Not a point that Governor chose to address.

He then moves on to a section headed “Monetary policy response to uncertainty”.

First up is a straw man

Firstly, maintaining low and stable inflation enables organisations and individuals to carry out meaningful financial planning, by reducing overall uncertainty. This is something that is nearly impossible when prices are high and volatile or falling uncontrollably.

Neither is a world any advanced country has been dealing with in recent decades (I’m assuming he meant “inflation” was high and volatile), and in the case of “falling uncontrollably” never.

Then we do get to recent New Zealand policy

In particular, it is now more suitable for us to take a risk-management approach. In short, this means we look to minimise our regrets. We would rather act quickly and decisively, with a risk that we are too effective, than do too little, too late, and see conditions worsen. This approach was visible in our August OCR decision when we cut the rate by 50 basis points. It was clear that providing more stimulus sooner held little risk of overshooting our objectives—whereas holding the OCR flat ran the risk of needing to provide significantly more stimulus later.

And yet, wasn’t that title something about a reliable “compasss point”.   None of his August approach was flagged in advance, arguments for it unfolded only slowly even after the event, and then –  when there was still (on his own numbers) “little risk of overshooting our objectives” they abandoned that particular “least regrets” line, without explanation in advance, in the release, or subsequently.  He goes on

We can also address uncertainty through our communication and forward guidance, which are broad-ranging. We reveal our assessment of the economy—good or bad—to the public, so they can make decisions based on the best possible information amid the prevailing uncertainty. We voice the types of policies we believe may be needed to sustain long and prosperous growth—be they monetary, fiscal, or financial policies.

But that is almost exactly the opposite of what the Governor and MPC are doing.  We have still not had a single substantive speech from the Governor on monetary policy and the economy.  We haven’t at all from three of the statutory members of the MPC.  It is harder to make good decisions when central banks spring –  quite unnessary – surprises.  Oh, and actually it is no part of the Bank’s mandate to be opining on what policies are best for “long and prosperous growth” (although it is remarkable that structural policies appear not to be relevant to the Governor’s view of growth, productivity etc).

There is a final page on “Beyond conventional monetary policy” which I don’t have particular problem with.  It is good that the Governor again repeats his intention to publish their analysis. It is only a shame that (a) this process has been so long delayed, including under his predecessor, and (b) that the work done so far has not proceeded in a more open and consultative way, rather than being something akin to the “wisdom” delivered to the masses from the wise experts on the mountain top.

Orr ends in a typically upbeat tone.   I just want to highlight the last few sentences in which (as so often) he overreaches, partly in the process of distracting attentions from the failings in areas he is directly responsible for.

Yes, there is uncertainty. Yes, it is affecting us. No, monetary policy cannot directly resolve this issue. But we can offset its effects and empower others to fuel economic activity that will benefit us in both the short and long-term. There has never been a greater time to make use of accommodative monetary policy for investing in productive assets.

Yes, monetary policy has a (vitally) important stabilisation role.  It was why countries set up discretionary monetary policy many decades ago.   But it can do nothing to offset the blow to potential output created by policy uncertainty and other regulatory burdens.  It does nothing to boost our longer-term prosperity.  And as for the final sentence…….he falls into the trap again of trying to convince us that low interest rates are some exogenous gift, empowering whole new opportunities, when in fact interest rates –  long-term market-set ones and official OCRs –  are low for reasons that seem to have to do with diminished opportunities, diminished prospects for profitable investments.  Don’t get me wrong – given all that, the OCR should be lower (mimicking what real market forces would be doing if short-term interest rates were a market phenomenon), but when interest rates are falling in response to deteriorating fundamentals it is a stretch –  at very least –  to expect the sort of pick-up in business investment the Bank often forecasts but rarely gets to see.

It wasn’t a persuasive or particularly insightful set of comments.  Perhaps his San Francisco audience –  knowing little of New Zealand –  weren’t bothered, but we should be.  We should expect a lot more from such a powerful, not very accountable, public figure.

(And if you want a speech from a much more serious figure, try this one –  given at the same conference –  by Stephen Poloz, Governor of the Bank of Canada.  There is a depth and seriousness to it that is simply now not seen from senior figures in our own economic policy agencies.)

Effective communications and consistent messaging (not)

One can debate whether or not the Reserve Bank should have cut or not.  Reasonable people can differ on that.  But their communications quite clearly needs (a lot of) work.   This post is just one illustrative example of the sort of problem there is: the role of inflation expectations in their thinking and public commentary.

Back in the August Monetary Policy Statement – the one where they announced the rather panicked 50 basis point cut, not really consistent with either the rest of the document or their own numbers – there wasn’t much mention of inflation expectations.  To be specific:

  • they are not mentioned at all in chapter 1, the main policy assessment/OCR announcement,
  • they are mentioned more or less in passing in the minutes, viz

Some members noted that survey measures of short-term inflation expectations in New Zealand had declined recently. Others were encouraged that longer-term expectations remained anchored at close to 2 percent.

with no suggestion that it was a significant part of the story

  • of the seven other references in the document, five are simply labels of charts, and one was in the standard descriptive framework section (“how we do monetary policy”).  The only other substantive reference was pretty unbothered.

Although survey measures suggest inflation expectations remain anchored at around 2 percent, firms and households continue to reflect past low inflation in
their pricing decisions.

If that had been all, a reasonable reader might have assumed expectations measures were something they were keeping an eye on, but weren’t much of a concern, or playing much of a role in the OCR decision.

But in his press conference, we got the first hint of a quite different line.  Perhaps the Governor genuinely felt differently than the majority of the MPC –  which frankly seems unlikely, given that he chairs the committee and he and has staff have a majority on it –  or perhaps he was simply casting around, more or less on the spur of the moment, for reasons to justify cutting by 50 basis points rather than the 25 points everyone had expected (50 point moves not having been used since the height of the 08/09 recession).

But whatever the reason, in answer to a question (just after the 10 minute mark here) he made the following points:

  • they’d tossed and turned between going 50 points then, or 25 points then and 25 later and,
  • over recent days they had become increasingly convinced that doing more sooner was a safer strategy to achieve their targets than a strategy of going more slowly over a longer period. He went on to note that
  • it was all about the least regrets analysis and stated that in a year’s time he would much prefer to have the quality problem of inflation expectations getting away on us, and possibly having to think about “other activity” [ tightening?]
  • that was preferable (better/nicer) than finding a year hence that they had done too little too late.

I was quite taken with those comments at the time, and commented positively on them in my own review of that MPS.  It seemed exactly the right way to think about things, especially as in the same press conference he was highlighting the risks of the OCR having to go negative (the more that could be done now to boost expectations, the less likely the exhaustion of conventional monetary policy capacity).

But do note that none of that “least regrets” perspective was reflected in the MPC minutes.

The Governor obviously took something of a fancy to this line.  In a interview with Bernard Hickey a few days later, of which we have the full transcript, he is quoted thus

“Doing the 50 points cut was interesting: whilst you get closer to zero, you also shift the probability of going below zero further away,” Orr said.

and

We’ve spent a lot of time around, I suppose, regret analysis, and I spoke about – you know, in a year’s time looking back, thinking ‘well, I wish I had done what?’ And I thought it’s – I would far prefer – and the committee agreed – far prefer to have the quality problem of inflation expectations starting to rise and us having to start thinking about re-normalizing interest rates back to, you know, something far more positive than where they are now. And that would be, you know, it would be a wonderful place to have regret relative to the alternative: which would be where inflation expectations keep grinding down.

and a few days later, in a speech given in Japan, the Assistant Governor was also now running this message (emphasis added)

A key part of the final consensus decision to cut the OCR by 50 basis points to 1.0 percent was that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives. In particular, it would demonstrate our ongoing commitment to ensure inflation increases to the mid-point of the target. This commitment would support a lift in inflation expectations and thus an eventual impact on actual inflation.

On balance, we judged that it would be better to do too much too early, than do too little too late. The alternative approach risked inflation remaining stubbornly below target, with little room to lift inflation expectations later with conventional tools in the face of a downside shock. By contrast, a more decisive action now gave inflation the best chance to lift earlier, reducing the probability that unconventional tools would be needed in the response to any future adverse shock.

I commented positively on that too.  It was good orthodox stuff.

And it kept coming.  In an interview with the Australian Financial Review, at Jackson Hole, a few days later, here was Orr

Q Was this [falling world rates][ front of mind when you did your recent interest rate cut?

A. It was front of mind. Without doubt the single biggest….one [factor] was domestic.  We saw our inflation expectations starting to decline and we didn’t want to be behind the curve.  We want to keep inflation expectations positive-  near the centre of the band.

And it was also referred to in passing in the folksy piece the Governor put out back here that week, noting “lower inflation expectations” as second in the list of influences on the OCR decision.

And here it was again in the Governor’s 26 September speech

We also judged that it would be better to move early and large, rather than risk doing too little too late. A more tentative easing of monetary policy risked inflation expectations remaining stubbornly below our inflation target, making our work that much more difficult in the future.

By this point – less than two months ago – any reasonable observer would have been taking note.

So what had actually happened to inflation expectations by this point?  At the time of the August MPS the Bank already knew that the 2 year ahead expectations had fallen quite a bit  –  from 2.01 per cent to 1.86 per cent in a single quarter.  That’s not huge, but it is not nothing either, and with core inflation still below 2 per cent it wasn’t something the Bank should have been that comfortable with.  The year ahead measure (noisier) had dropped by more.

As it happens, the other main inflation expectations survey –  the ANZ’s year ahead measure –  hadn’t dropped at all by the time the Bank acted in August: from May to July year ahead expectations were in a 1.8 to 1.9 per cent range.   In August – but not published until 29 August –  they fell to 1.7 per cent, and over the last couple of months they’ve fallen a bit further, the latest observation being 1.62 per cent.

As for the RB survey, there was also a slight further drop in mean expectations in the latest survey that was released on Tuesday (but which the Bank had in hand throughout its November MPS deliberations).

Both the latest ANZ and latest RB surveys were completed exclusively in the period well after the Bank’s surprise 50 point cut in August.  If the Governor (and Hawkesby) were serious about that rhetoric they’d surely have hoped to have seen at least some bounce in the latest survey –  after all, that was the logic of preferring a big cut early.   Instead, those survey measures fell a bit further (not to perilous levels of course –  in fact, current levels are just consistent with where core inflation has been for some time, a bit below the target midpoint).

During the Wheeler/McDermott years the Reserve Bank rarely if ever mentioned the market implied inflation expectations, calculated as the breakeven rate between indexed and nominal government bond yields. I used to bore readers pointing out this curious omission –  they never even explained why they felt safe totally discarding this indicator.

Inflation breakevens have been below 1.5 per cent now consistently for four years now and fell further this year.  In recent months, those implied expectations –  average inflation expectations for the coming 10 years –  were just on 1 per cent.  In monthly average terms, the low point wasn’t even July/August (ie just prior to the MPC’s bold action) but October.

Here is the chart, monthly averages but with the last observation being today’s.

breakevens nov 19

As the Governor was very keen to point out yesterday, there has been a small lift in this measure……but he was less keen to mention the level; the small lift only takes the breakeven rate back to aroud 1.13 per cent.  This time last year it was 1.41 per cent, still miles below the target midpoint.  Perhaps the recent lift will be sustained –  we should hope so –  but on any reasonable balancing of survey and market measures you could really only say things hadn’t got worse over the period since August.  On the clear words of the Governor and Assistant Governor, it was quite reasonable for analysts/markets to look at the inflation expectations data and expect it to feature prominently in this week’s MPS – after all the merits of the Governor’s August/September arguments (agree with them or not) hadn’t changed, expectations hadn’t lifted, and the Bank had given no hint they’d changed their way of thinking, yet again.

But what did the MPC have to say about inflation expectations on Wednesday?  Again there was nothing at all in the chapter 1 policy assessment/announcement, and there was just this in the minutes

The Committee also noted the slight decline in one- and two-year ahead survey measures of inflation expectations. Nevertheless, long-term inflation expectations remain anchored at close to the 2 percent target mid-point and market measures of inflation expectations have increased from their recent lows.

They were pretty half-hearted, even about those market breakevens.  No mention at all of the arguments the Governor and Assistant Governor were running only a couple of months ago, and although the minutes do now mention the idea of least regrets this was all they said

In terms of least regrets, the Committee discussed the relative benefits of inflation ending up in the upper half of the target range relative to being persistently below 2 percent.

The Governor’s comments in August certainly suggested he’d have thought it better then to run the risk of being a bit above 2 per cent (after a decade below).  But this time, the Bank as a whole has reverted back to the cautious approach the Governor was looking unfavourably on, in public, only three months ago.   We are back to “oh well, never mind”, or so it seems, and all that pre-emptive talk,  doing what they can to minimise the risk of needing to go below zero, is supposed to disappear down the memory hole?

It seems all too symptomatic of what is wrong with the way the Bank is conducting monetary policy at present.    There are few/no substantive speeches, the minutes capture little of the flavour of thinking, half the MPC members are simply never heard from (and no one knows if they have any clout or not), there is no personalised accountability (as a market commenter here noted, it is incredible that no one on the Committee was willing to record a dissent yesterday, all hiding behind the Governor)….and then we get the Governor just making up policy rationales (quite sensible ones in this case) on the fly, only to then jettison them, without explanation or a chain of articulated thought, when for some reason (still unknown) they no longer support his instincts.

Was it ever an approved MPC line?  If not, why was the Governor just making up stuff  –  and then repeating it several times in open fora?  Under the rules he is supposed to be the spokesman for the whole committee.   And if it was an approved line why (a) did it never make it into the MPS, and (b) why has the MPC now changed its thinking when there is no sign of significant rebound in expectations, the effective lower bound is still in view, and the domestic measures have actually been drifting lower?

There is little basis for observers and markets to make any reliable sense of the MPC.  We know little, that is in any way consistent, about their reaction functions, their loss functions, their models, or even their stories about what is going on locally and internationally.  Big surprises, of the sort we’ve had in New Zealand at the last two MPSs, have become quite uncommon internationally, and that is generally a good thing.  Where are we now –  18 months into the Orr governorship, 7 months into the new MPC –  simply isn’t good enough  The reforms the government initiated last year could have been the opportunity for something genuinely much better.  Instead all we seem to get is a bit more expense –  all those high fees for the silent, invisible, and unaccountable externals.

Monetary policy isn’t being handled well, and neither is bank supervision (bank capital and all that).   Together, these twin failings in the Bank’s two main functions paint the Bank and the Governor –  and those responsibe for holding them to account in a pretty poor light.    There are hints that, under pressure, the Governor may have recently toned down his act and started to operate a bit more professionally.  If so, it would not be before time, but if this week was anything to go by the tone may be a bit better but the substance of the messaging and communications still leaves a lot to be desired.  At present, the best guess (sadly) would be on another lurch, in an unpredictable direction, relying on new arguments plucked fresh from the air, with no one certain quite who they represent or how long they will last.

Good in a few parts….pretty poor otherwise

There were some good aspects to yesterday’s Reserve Bank Monetary Policy Statement:

  • the Bank has abandoned its long-running over-optimism about future productivity growth and has thus revised down its estimates of potential (GDP) growth to more reasonable rates.  Nothing in the economic strategy –  this government or its predecessor –  seemed set to deliver better, and it is good that the central bank has stopped spinning candy floss numbers (at least on that count),
  • the Governor also seemed less effervescent, and perhaps consistent with the previous point there was little or no spin about just how well the economy was doing,
  • in the document there weren’t even further direct calls for more government spending/borrowing.  This change was defended on the grounds that the message had already been given, but I doubt that was all there is to explain the change (having said something once, even loudly, rarely discourages central banks from saying them again),
  • oh, and the folksy Maori salutations at the start of the main statement –  beloved by the tree-god Governor when it was his statement alone –  seem to have quietly disappeared.  Perhaps we might hope for the eventual quiet discontinuance of the cartoon version of the statement too?

But that was about all that could be said for it.

The document itself was weak on substance, building on consistently poor (largely non-existent) communications from the Bank.

You can tell that there are problems with communications when the Governor is reduced to repeating (numerous time in the parts of the press conference I saw) “we are trying to be as transparent as possible”.  He isn’t seriously trying, and certainly isn’t succeeding.  We’ve not yet had a serious speech on the economy and monetary policy from the Governor, after seven months we’ve heard not a word from four of the MPC members (including all the externals), background papers aren’t released even with a long lag, the MPS documents themselves offer ever-less insight or sense of how (or even whether) the MPC thinks in depth about the economy, and the Bank holds data close to its chest when it could release it more promptly (asked about this latter point yesterday the Governor did undertake to review their practice).

When two successive MPS OCR wrongfoot those paying closest attention to the data and to the Bank, it suggests the problem is with the Bank, not the observers.      It would be interesting to know what advice the Bank’s financial markets staff gave the MPC about the market movements that were likely to occur as a result of yesterday’s decision.

It was only a few weeks ago that the Assistant Governor, Christian Hawkesby, gave a speech on central bank communications, probably mostly trying to fend off criticism of how they’d done in August.    In that speech he highlighted –  and overstated, at least in practical terms –  the risks if central banks do what markets expect them to do

In this scenario there is a danger that markets end up paying too much attention to our communications for what we have said ‘we will do’, leaving no one left to analyse the incoming economic data for what ‘we should do’. As a central banker, I am far more interested in listening to what ‘we should do’.

And yet, yesterday’s MPS suggested that Hawkesby and his colleagues actually had no interest in that perspective either.   As I noted in yesterday’s post, the MPC has had available to it throughout its deliberations the results of the Bank’s survey of expectations, the macro views of several dozen informed observers of the New Zealand economy. I wrote about the results yesterday.  Those respondents expected the Bank to cut yesterday (and again next year) and even so they didn’t expect two-year ahead inflation to get above 1.8 per cent and expected no rebound in GDP growth either.    Implicit in those numbers (and consistent with the mandate given to the MPC by the government) is a pretty clear view that the Bank should have cut the OCR, and should probably do so again next year.  The Bank, apparently uninterested, chooses to ignore this weight of opinion and runs with its own idiosyncratic view that even with higher interest rates they were still get the growth rebound the outside observers couldn’t see (either three weeks ago when they completed the survey or –  judging by comments from market economists in the last day –  now).  In the end, the MPC is charged with making decisions, but having got things wrong –  below target inflation –  for the last decade, the onus is surely on them to explain why they (mostly non-experts themselves) are so willing to back an away-from-consensus call.   But they made no effort to.

In fact, if you started into the document without knowing the bottom line you’d think the case for easing yesterday was pretty unambiguous.  They told us that the economy had slowed and risk were to the downside, the world economy was slowing, inflation expectations were very low and/or falling and, of course, core inflation was below target.  And all that without even so much as a single mention –  in the entire document, includung the minutes –  of the apparently significant tightening in credit conditions respondents to their own credit conditions survey were foreshadowing, those same respondents having highlighted regulatory changes (ie most likely the coming big increases in minimum capital requirements) as a big issue.

credit 4 Or perhaps the MPC is back to thinking that credit conditions really don’t matter at all?  Surely, either way it would be reasonable to explain their perspective.  Instead they seem to have simply ignored the issue (or tried to pretend the Governor’s whim wasn’t an issue –  I heard Hawkesby on the radio this morning saying they had in fact taken account of credit conditions issues, in which case the OCR decision is still more mystifying, and the absence of any reference in the official documents looks even worse).

One of the disappointing features of yesterday was that there were signs of the Wheeler Reserve Bank returning.   Under the former, not widely lamented, Governor we heard endlessly from the Bank about how stimulatory monetary conditions really were –  even as inflation just kept on falling below their forecasts.  There was a lot of that line yesterday.    As then, so now, the Bank does not have a good read on where the neutral interest rates are, and the best guide is really something like the rear-view mirror: all else equal, look at what is happening to demand (and early indicators like business activity measures) and inflation.   In the Wheeler years, there was also a strong tendency to constantly be focusing on the merest hint that something might be picking up, because of the strong belief (see above) that conditions were “highly stimulatory”.  It was all rather circular –  we think we are right because we think we are right.     There was quite a bit of that sort of flavour in yesterday’s statement too: both the forecast pick-up in growth (that few other observers appear to believe) and the repeated mysterious suggestions that inflation itself was picking up now.

In the MPS the Bank shows five core inflation measures, and also highlights as a preferred measure the (highly persistent and stable) sectoral core factor model measure

core infl nov 19

Across the wider suite of measures, there has been no lift since 2016.   And the sectoral core factor measure has been flat at 1.7 per cent for more than a year.  And core inflation is a lagging indicator in a climate where (to quote the Bank) the New Zealand economy has been slowing and the world economy has been slowing).

What about core non-tradables inflation?  The headline non-tradables inflation rate did rise recently.

core infl NT.png

The blue line is an official SNZ series, while the orange line in an RB series.  Again, no sense of any pick-up in core domestic inflation pressures –  and nor, really, would one expect there to be in an economy where activity growth has slowed, unemployment has levelled out, confidence is low, policy uncertainty is quite high, and inflation expectations (remember them) are low.

In short, there was a (welcome and overdue) pick-up in inflation a couple of years ago, but there is no sign it is continuing.  And –  since the OCR cuts this year were against the backdrop of materially deteriorating fundamentals –  there isn’t much reason to expect further increases in inflation from here on current policy (perhaps especially not when credit conditions are tightening, and RB announcements are pushing up interest and exchange rates).

Incidentally, one line –  used several times yesterday – that you shouldn’t be fooled by was the one that “the projections were consistent with either choice –  a cut or leaving the OCR unchanged”.  Well, of course…….    Unless practice has changed very very markedly from the way things were when I was closely involved in these processes, the final projections track –  especially the interest rate track –  is tailored to be consistent with the policy options and messages the decisionmakers (in my day the Governor, these days –  at least on paper –  the MPC) want to send. If the MPC wasn’t clear in its own mind last week what it was finally going to do, they’d prudently have ensured that the final track was consistent with either option.  If they’d been clear but wanted to send a message that they’d been open to a possible cut, they have done the same thing.  There is no independent evidence or perspective in (the first few quarters) of that track.

I want to circle back to the claims around the (asserted) high degree of transparency.  One of the innovations in the new monetary policy governance model is the publication of the summary record of the meeting (aka “minutes).    These are typically a bit longer than the initial policy announcement statement itself, and do provide the opportunity to note a few issues there wouldn’t otherwise be room for.  But they are proving even less enlightening than one might have feared (given the way the Governor and the Minister got together to oppose a more genuinely open model, of the sort seen in central banks in places like the US, the UK, Japan, or Sweden).

Here are four examples from yesterday’s minutes.  First, fiscal policy

The Committee discussed the impact of fiscal stimulus on the economy. The members noted that fiscal stimulus could be greater than assumed. The members also discussed the potential delays in implementing approved spending and investment programmes.

So far, so banal.  As I noted earlier, in the official documents the Bank was back to staying in its line re fiscal policy (as the Governor said, “we take fiscal policy as announced and run on that basis” –  which is how things are supposed to work).   And yet this morning on Radio New Zealand Christian Hawkesby was heard stating that “we think more fiscal spending would be helpful in stimulating the economy”.     If that is the Committee view, why isn’t it in the MPS or the minutes, if it was substantively discussed why isn’t it in the minutes, and if it is true then – given that the, as the Governor said, the Bank takes fiscal policy as given – isn’t Hawkesby’s statement further evidence that they should in fact have cut the OCR yesterday (if they think the economy needs more stimlus, and they are responsible for deploying the primary counter-cyclical tool)?

Then, the work programme on how the Bank might handle reaching the limits of conventional monetary policy

The Committee noted the Bank’s work programme assessing alternative monetary policy tools in the New Zealand environment, as part of contingency planning for an unlikely scenario where additional monetary instruments are required.

A statement which tells readers precisely nothing (especially as it is now three months since the Governor told a press conference that the work then was “well-advanced”).  As it happens, reality seems a bit better than the minutes imply because when he was asked about this work programme yesterday and bringing it to light, the Governor revealed  that they will release a document on frameworks and principles in the new year, and will (he says) be keen on feedback and discussion.  That sounds more promising, but then where does the MPC fit into all this given the unrevealing comment from the minutes (and there are longstanding doubts about just who has power over any unconventional instruments –  whether the MPC will get much say at all)?

Then we are told they had a discussion on an important immediate policy issue

In terms of least regrets, the Committee discussed the relative benefits of inflation ending up in the upper half of the target range relative to being persistently below 2 percent.

But that’s it.  We are given no insight into the arguments deployed, the competing cases made, or the conclusion.  Given their OCR decision we are left to deduce that the Committee would be quite worried indeed about (core) inflation getting above 2 per cent.  But we are given no hint of why –  despite 10 years now below that midpoint.   And this is what the Governor calls being as transparent as possible?

And finally, the OCR decision itself

The Committee debated the costs and benefits of keeping the OCR at 1.0 percent versus reducing it to 0.75 percent. The Committee agreed that both actions were broadly consistent with the current OCR projection. The Committee agreed that the reduction in the OCR over the past year was transmitting through the economy and that it would take time to have its full effect.

And, again, that is it.  No hint of the competing arguments –  which could readily be done without identifying individuals –  and no hint of why they chose to come down where they did?  What were the key costs the Committee saw to cutting the OCR (especially when both market expectations and observer implict recommendations were to cut).  There is no insight into the current decision or, importantly given the absence of speeches etc, no insight into the reaction functions/loss functions members (individually or collectively are using).  It simply isn’t very transparent at all.    The mantra overnight “just watch the data, just watch the data” isn’t really much use at all –  especially when the MPC is going to run with such a non-consensus view of the data (and/or the risks around policy reactions).

It is all pretty underwhelming and confidence-draining.   The point isn’t that a huge amount macroeconomically hung on any specific OCR decision. Nor for now is the economy in cyclical crisis –  we aren’t in recession, inflation isn’t falling away sharply.   The concern is that we have a central bank led by pygmies (no offence to the central Africans).  Not one of the MPC members –  all of whom are probably pleasant people (even the Governor if people aren’t challenging him) –  command any great respect for their insight into the economy, their judgement or intellectual leadership, or for their willingness/ability to communicate a persuasive story or a sense that they themselves have a good and robust framework for thinking about the economy.   In the case of the Treasury observer – who gets to participate not vote – it might have been her first ever significant meeting on advanced economy macro issues, but in the end responsibility rests with the voting members.  They are failing us, corralled by the unconvincing Governor.    Having substantially surprised the market (deliberately and consciously so) two MPSin a row, and chosen to ignore consensus opinion on likely economic developments, you’d have thought we’d be hearing a lot from the MPC members –  minutes that clearly outlined the issues and judgements, speeches articulating mental models and perspectives on the New Zealand economy, wide-ranging interviews (of the sort senior Fed officials give).  Instead, we have weak official stories (the MPS), unrevealing minutes and –  seven months into the new model –  not a word in public from any of the external members nor from the Bank’s chief economist.

It isn’t good enough.  The Bank’s Board should be demanding better, as should the Minister of Finance (including when he comes to appoint new Board members and the Board chair in the next couple of months).   Transparency and communications aren’t about publishing forward tracks –  one of the Bank’s own recently-departed researchers published research last year suggesting they make little difference – but about open and honest engagement, laying out the uncertainties and (inevitable) differences of possible perspective in a business characterised by so much uncertainty.  How decisionmakers demonstrate that they handle uncertainty, competing narratives and even disagreement, is the sort of thing that helps build confidence, not rote publications (let alone poor, surprising, decisions) or Soviet-style phalanxes of grey bureaucrats all lined up with the Governor.

UPDATE:

You might think I sometimes put things fairly strongly (if often at considerable length).  I wouldn’t have wanted people to miss this comment on my post left by a banker. It was both strident and succinct.

conal

 

 

No big improvements expected

This afternoon brings the release of the Monetary Policy Committee’s latest Monetary Policy Statement and OCR decision.  Most commentators expect the Bank to cut the OCR by another 25 points.  I’m more focused on what they should do than on what they will do – the two can diverge for quite a while at times –  and I’ve been consistently clear that the OCR should be cut further.  If the MPC was wavering though, you’d have to suppose that they would want to avoid a second successive big surprise for markets which would –  rightly –  renew the focus on how poor their communications have been this year.

The last piece of data relevant to the decision was finally released by the Bank yesterday afternoon: their survey of the macroeconomic expectations of a few dozen supposedly somewhat-expert observers (of whom I’m one).   As I’ve noted already, this release once again gives the lie to the repeated Bank claims of how open and transparent they are: survey responses were due on 22 October, the Bank could easily have had them a couple of days later at most, and yet they held the information to themselves –  to no public benefit at all – until 12 November.  As for private benefits/costs, having the information in public on a timely basis might have spared poor Westpac from going out on a limb calling no change in the OCR, only to reverse themselves yesterday.   Market whipsawing, in the absence of data the Bank already had, serves no public benefit.

The expectations survey has been running, in one form or another (changing questions, big reductions in numbers surveyed) for more than 30 years now and provides a fairly rich array of data (although there are some important gaps –  eg immigration, the terms of trade – the Bank refuses to remedy).    We know that the surveyed expectations (mostly a quarter ahead, a year ahead, or two years ahead) aren’t in any sense accurate predictions about what actually happens in future.  But neither are the Reserve Bank’s forecasts (and that isn’t a criticism of anyone: forecasting is hard, shocks happen).   What they do provide is a useful read on how the somewhat-expert observer community sees things, in a reasonably internally consistent manner –  eg answers about GDP or unemployment are presumably done simultaneously with (recognising two-way influences) views on the future OCR or the future exchange rate.

The headline news –  well, only media coverage –  in yesterday’s release was the further fall in (mean) inflation expectations.  Two-year ahead expectations had fallen quite a lot in the previous survey, and there was no bounceback, just a further fall from 1.86 per cent to 1.81 per cent.   You wouldn’t want to make much of it –  dig just a little deeper and the median expectation didn’t change at all – but the absence of any bounce, especially coming on the back of the 50 point cut, explicitly linked to inflation expectations and a desire to keep them close to 2 per cent –  should still have disconcerted MPC members.

And these weren’t inflation expectations conditional on the OCR remaining at the current 1 per cent.  Instead respondents expect a 25 basis point cut today (median OCR expectation for the end of the year is 0.75 per cent) and a further cut next year.    And they still expect no recovery in medium-term inflation (and in financial markets themselves, the implied 10 year average inflation expectations –  the breakeven rate between indexed and nominal bonds – are still pretty close to 1 per cent, when the Bank’s target is 2 per cent).

Consistent with this, there is no rebound expected in economic growth either, whether as a result of things already in train or of those further expected OCR cuts.

expecs 19.png

No respondents expected a recession, although the lowest individual expected 2 year ahead growth rate was as low as 0.6 per cent.

There wasn’t much sign of an expected strengthening in the labour market either (although those series have been volatile and the survey was taken before last week’s labour market data were published).

What about overall monetary conditions?  The survey asks about assessments –  on a seven step scale – as of now, and expectations for (on this occasion) the end of March and the end of September 2020 (the latter roughly a year ahead),   “Monetary conditions” isn’t defined –  it is up to each respondent to factor in things considered relevant.   What was striking this time was the sharp increase in the proportion of respondents expecting monetary conditions to become “very relaxed”

mon con nov 19.png

I was left wondering what weight respondents were giving to tightening credit conditions (this chart from the Bank’s credit conditions survey, also released after the expectations survey was done)

credit 2.png

But whatever went into those “monetary conditions” answers, they weren’t producing an expected rebound in either growth or inflation.

In a speech a couple of weeks ago the Bank’s Assistant Governor ran one of his boss’s frequent lines bemoaning the risks central banks face if they simply follow short-term market prices (since those prices themselves include market implicit expectations of what central banks will do).  It was  –  and is – a real but overstated point.   But it is also where surveys of macroeconomic expectations are relevant and useful, not subject to the same critique.   This pool of respondents –  with no better or worse information on average than the MPC – expressed not just expectations for the OCR but for overall monetary conditions, and for economic activity and inflation.  So they factored in what they expect the Reserve Bank to do, and are (in effect) feeding back a collective assessment that it really looks, at best, like barely enough.  Who knows why: perhaps expected adverse world developments, perhaps more initial weakness here, perhaps a weaker transmission mechanism, but the data (expectations) are there for all to see.

Against that backdrop the MPC would really have to produce a quite compelling alternative narrative to justify not cutting the OCR further now, perhaps especially when there isn’t another review until February.

(As I’ve noted before, there is a rich amount of data in this survey not open to the public.  For example, on the OCR expectations question at least one respondent expected the OCR to be zero by September and another for it to be 1.25 per cent. It would be fascinating to see the –  one hopes consistent –  forecasts of each of those respondents and the stories that underpin them.  Reminding ourselves of the sheer uncertainty of the future, and the possible stories that might underpin such alternative outcomes, can be a useful discipline.)

Credit conditions

Back in mid-2009, just as the first glimmers of recovery  from the severe recession were emerging, the Reserve Bank launched a credit conditions survey (of lending institutions).  It was a sensible enough initiative but, to be honest, I never paid much attention to it.  We knew conditions had got very tight during the recession and (at least in my remaining time at the Bank) the data weren’t that interesting –  of course credit conditions were easier than they’d been in the midst of that financial scare, and when there were changes shown they were for pretty obvious reasons (eg access to housing credit was reported as tightening when the Governor imposed LVR restrictions).   Also, the number of institutions covered was quite small, and one had to worry that results could be affected by who happened to fill out the form in a particular institution on a particular occasion (plus, when reporting to your prudential regulator incentives aren’t entirely straightforward).

There is a series of questions about:

  • observed loan demand (by class of loan),
  • expected loan demand,
  • observed credit availability,
  • expected credit availability, and (since early last year)
  • a series of factors potentially affecting the availability of credit.

That makes for lots of series.  I’m less interested in the demand side, which is largely going to reflect stuff we see captured in other data (eg housing turnover, business surveys etc).  But demand for new business loans does seem to have fallen away somewhat in recent years.

But what about the supply side?

Here is observed credit availability over the last six months (the survey is six monthly) for the four business sectors (there was no particular change in availability to households).

credit 1

And here is what respondents expect (presumably from a position of knowledge, responsible for something around overall credit within their own institution).

credit 2.png

Yes, there is some idiosyncratic variability in the response at times, but in the ten year history of the series we’ve seen nothing like the tightening in expected conditions observed in the last few quarters, now across all the business classes (there is little movement on the mortgage and personal household lending categories).

It isn’t easy to know quite how much weight to put on these responses –  for a start, with only one incomplete cycle of observations, we have little idea of “normal” variability as economic conditions turn down.  But as the recent downturn is larger than the post-2009 upturn (coming off a pretty savage tightening in conditions) it doesn’t have the look of something that should be quickly glossed over.   It looks to represent a potentially quite material tightening in monetary and financial conditions.

The other question they have about actual credit availability might also tend to confirm that unease.  Respondents are asked about how credit availability is now compared to the past three years (I guess to smooth through idiosyncratic influences on the past six months).  Here are the responses for the business sector loans (household was directly and materially affected by the waxing and waning of LVR restrictions, a policy intervention).

credit 3.png

Again interesting that there had been little movement re SMEs, but for the other three business categories the scores are getting back towards levels we saw just after the last recession.

Early last year the Reserve Bank did a welcome extension to the survey and started asking respondents about the influence of various specific factors that could reasonably influence credit availability.  Here are answers.

credit 4

Cost of funds hasn’t been an issue in changing credit availability (nor would you really expect it to be –  should affect price rather than availability), and neither has competitive pressure, but look at those four striking negative yellow bars.    Risk appetite among the lenders, risk capacity, and (distinctively) regulatory changes have all worked to (apparently materially) tightened credit conditions.

Sadly, here we reach the limits of the survey. It would be fascinating to be able to disentangle quite what is going on.  There is a quite plausible story that all three of the other negative yellow bars are primarily a reflection of the fourth, regulatory change (presumably the Governor’s capital whims).  Perhaps it isn’t so, and there are independent reassessments of risk and willingness to bear risk going on in head offices, whether here or in Australia, but whatever the precise combination of factors it is pretty likely that regulation is already weighing fairly heavily on credit availability in New Zealand. (I only qualify that claim a little because banks perhaps have an incentive to play up the issue, knowing that the Governor is about to make his final capital decisions, but I doubt that is more than a marginal factor here, given the small number of respondents and the ability of the Bank to query each).

You may recall the consultation document the Bank published almost a year ago on the Governor’s proposals to greatly increase capital requirements for locally-incorporated lenders.  You may not recall the discusssion of these sorts of effects, let alone the apparent differential sectoral effects.  That isn’t the fault of your memory.  There just was no discussion of those issues in the document.  Which seemed odd at the time, and even more extraordinary now.  It will be interesting to see how the Governor responds to these data in his two scheduled press conferences in the next few weeks (MPS and FSR).

While these data are clearly of some relevance to the bank capital debate, my main interest in them was in the more immediate issues around the appropriate stance of monetary policy and the setting of the OCR.   There appears to have been quite a sharp change in market sentiment/pricing and the views of some market economists this week on the chances of the Bank cutting the OCR on 13 November (the reasons for that change still aren’t fully clear, and one is left wondering if the Bank has been signalling –  by accident or design –  some change in its own view).

My interest is much less in what the Bank will do in the short-term, but in what they should do (which should, of course, make my commentary of interest to the Bank, given the Assistant Governor’s speech the other day, but…..).  “Will” and “should” eventually tend to converge, but it can take some considerable time for them to do so.

But if we grant that this credit conditions data is material the MPC did not have when they did their August forecasts, or made their slightly panicked last minute decision on a 50 basis point cut, and did not even have at the last OCR review, it really should be  colouring the projections they finalise next week (even if the variable might not feature in their formal models).  Add in own-activity business survey data that has shown no signs of rebounding since August, inflation expectations that have either fallen further (surveys) or remained very low (inflation bond breakevens), and a core inflation rate that remains consistently materially below the (focal) midpoint of the inflation target, the case for not cutting the OCR in November seems weak at best.  There isn’t another review opportunity until February, the world situation (if not one of sentiment spiralling downwards) seems no stronger substantively, and for a committee that was sufficiently rattled to do a 50 point cut only three months ago –  and not to have seen anything much improve since then –  to do nothing now would only further muddy the communications waters, leaving people even less clear about how the MPC thinks, or that there is a consistent and disciplined process at work, secreted away from the public/market spotlight.

(Bearing in mind that there is still some material local data to be released before 13 November) the risks around a further OCR cut in November at present look quite asymmetric.  As we drift closer to the next recession, and to the limits of conventional monetary policy, the very best thing that could possibly happen would be positive surprises on core inflation, spilling over into somewhat higher inflation expectations.  People are no longer convinced inflation will settle at 2 per cent or above. It would be better, for almost everyone (certainly for the management of the next downturn) if they were.   When credit conditions appear to be tightening quite materially –  and that even before the final decisions are announced –  getting that sort of outcome will be made harder than necessary if the Bank ends up setting on its hands, confusing messaging, all for what?  So that the Governor can get some perverse psychic satisfaction from surprising people again?   Unpredictability is not a desirable feature of public policy.

 

Monetary policy communications and the lack of transparency

The Reserve Bank’s Assistant Governor for monetary policy and financial markets, Christian Hawkesby, went off to Sydney earlier this week to talk to some investors about New Zealand monetary policy communications.  Hawkesby now has tenure and independence –  at least in principle – as a statutory officeholder, a member of the Monetary Policy Committee, appointed directly by the Minister of Finance.

It was perhaps telling that (a) the speech was delivered on a New Zealand public holiday, (b) the text wasn’t released for another 24 hours, and (c) we have no record of what Hawkesby actually said, including in response to questions.  That is no way to do monetary policy communications.

Perhaps while he was in Sydney Hawkesby dropped in on his peers at the Reserve Bank of Australia.   The RBA has about 45 speeches/presentations from senior managers showing on its Speeches page for 2019.   For all but three of them –  and none of those three on topics that appear market-sensitive –  there is video, audio or a Hansard transcript (several of the Governor’s appearances were to parliamentary committees).  It doesn’t seem to make any difference to the RBA whether the speeches etc are given overseas, out in the provinces in Australia, or in downtown Sydney or Melbourne: the standard they set for themselves is that when they say something, it is made generally available.    Anything else poses a risk –  actual or in appearances –  of unequal access to potentially market-moving, or just insightful, official information and perspectives.  That is just one aspect of communications on which the Reserve Bank of New Zealand falls a long way short of best practice.  There are 12 speeches from senior managers on the Reserve Bank of New Zealand’s Speeches page for 2019, and for only of them is there video footage (that a puff piece by the Governor –  which I wrote about here).

Hawkesby’s speech came in two parts.  The first was devoted to repeating longstanding Reserve Bank spin about how transparent it is, supplemented by some Orr-esque lines about how surprising the market is no bad thing (the second part was defensive play around the surprise August 50 bps OCR cut).  There were no fresh insights or arguments, which in itself was a bit disappointing from so senior a figure, relatively newly returned to the Bank  –  despite the relatively junior-sounding title, Hawkesby is, in effect (and in Wellington public service lingo) a deputy chief executive responsible for half the Bank’s core functions.  Anywhere else in the world he’d carry a Deputy Governor title.   Those are the standards his speeches should be held to.

The Reserve Bank (longstanding) main claim to being highly transparent is that it publishes a future track for the policy interest rate (the OCR) for a period two to three years ahead.  We were the first central bank to do so, in 1997.  As Hawkesby notes, despite 22 years experience, only a handful of other central banks  (four small advanced country ones) have followed our lead.  Reasonable people can debate whether publishing a forward interest rate track is the best way to do things (I’ve never been convinced myself) but when none of the world’s leading central banks have taken that path –  and all will, quite seriously, proclaim a commitment to transparency –  it probably isn’t something to put quite as much weight on as the Bank has done (through successive Governors/staff).

I’ve characterised the publication of the forward interest rate track as being highly transparent about something the Bank (now, at least formally, the MPC) knows almost nothing about.  Economic forecasting is a mug’s game, and there is little evidence that anyone can usefully forecast economic developments more than perhaps a quarter or two ahead….and yet, monetary policy works with a lag, so a medium-term OCR projections (for, say, 2.5 years ahead) implicitly requires –  to be meaningful – some intelligent view of inflation prospects perhaps four years hence.  No one can do it in a way that has any useful substantive information.

And if the Reserve Bank is pretty transparent about the stuff it knows almost nothing about –  and has to divert scarce resources to generating such tracks –  it is really quite strikingly non-transparent about the stuff it does know more about.  For example:

  • we have a Governor, clearly the most important player in the system, who has not yet given a particularly substantive speech on monetary policy, the economy, and inflation (which would otherwise offer insights on his thought processes, his mental models, his ability to process and analyse data etc),
  • we have a Chief Economist –  also a statutory appointee as member of the Monetary Policy Committee –  who has not given a speech or said a substantive word in public since he was appointed,
  • as above, the Bank isn’t particularly transparent around the speeches it does give (and especially around answers to questions),
  • we have three non-executive members of the Monetary Policy Committee from whom not a word has been heard since they were appointed.  We know nothing about how any of them think about the policy targets towards which they are working, about how economic developments are unfolding, or about the “reaction functions” they use  (and this is so even though the rules allow them to speak), and
  • the Bank is totally untransparent about the background analysis produced to support monetary policy decisionmaking.   The current government –  not naturally particularly transparent –  has adopted a practice of pro-active release of Cabinet papers, many Budget-related papers have long been pro-actively released, but ask for any background papers re monetary policy decisions –  even with quite a lag –  and the Bank will simply refuse (and, sadly, they have the ineffectual Ombudsmen –  over several appointees – wrapped around their little finger in clasping this taxpayer-funded analysis tightly to their chest).  Perhaps it is lawful, but it simply isn’t transparent.   (A few years ago, after many months of trying, I managed to get them to release background papers for an MPS from 10 years previously –  but no one supposes they would release such material from, say, two years ago.  If there is a decent argument for any confidentiality around this material, it could only credibly mounted for the period from one MPS to the next –  ie three months or so – at most.)

That isn’t good monetary policy transparency, nor is good open government (the latter not being a consideration that ever weighed much with the Bank).

Hawkesby attempts a defence of the Bank’s preferred practice, in which only the Governor speaks about monetary policy (no speeches of course, just MPS press conferences) and to the extent that underlings like Hawkesby speech they largely parrot the Governor.   This is the best he can manage

A third limitation of transparency is the noise that it can create – an example of this is how to capture the diversity of views of individual members of a committee tasked with setting interest rates.

An example of this is how to capture the diversity of views of individual members of a committee that sets interest rates. Each individual member regularly sharing their views on the economic and policy outlook can make it harder for financial markets to interpret the reaction function of the collective group. While I worked at the Bank of England, I always remember the head of communications bemoaning the cacophony of voices. More transparency around the perspectives of individual members could also create incentives for those individuals to hold on to a previously published position even as new information emerges, for fear of being seen as ‘conceding’ their position.

A paradox of these limitations is that greater transparency does not necessarily equate to increased clarity for market participants and the general public. Just because more information is available does not necessarily mean the audience will have a greater understanding of how and why central banks make decisions.

But there isn’t much there.  Of course Communications managers are keen on message discipline –  always have been, always will be –  and at the Bank of England management was long not very keen on the independence of the external MPC members anyway.  But isn’t it striking that whereas the Reserve Bank seems to believe that New Zealanders –  public, markets –  can’t cope with a diversity of views (about a highly uncertain business), the national central banks for the largest advanced economies –  the US, Japan, and the UK –  in fact do cope quite well with having MPC members explicitly voting against a majority view, or articulating a model or analytical insights a bit different from that of others on the relevant committee.   Sweden is a succesful small country example.  The ECB is a bit different –  and there are some reasons why, around minimising pressure on members to act for their own country’s national interests –  but even in the ECB there is plenty of open recognition of differences of view among the monetary policy decisionmakers.   It isn’t as if central bankers know from year to year –  often not from quarter to quarter –  what they are going to do: events happen, interpretations evolve, and particular hypotheses are openly challenged and scrutinised (including those of monetary policy decisionmakers, when we are allowed to see them).

So, no, the Reserve Bank of New Zealand really isn’t particularly transparent at all.  And the newly published minutes really represent not much of a step forward at all.

One of Hawkesby’s points is that the Bank is keen to learn from outsiders –  yes, even “bloggers”.

When private sector economists, analysts, commentators or bloggers don’t agree with our policy decisions or our projections for the economy, it can be an uncomfortable message to hear. But it is an invaluable exercise to test our assumptions and reasoning, even if we don’t agree with their conclusions, we inevitably learn something along the way and strengthen our analysis of the issues.

Good to know (although it is a bit to take seriously when we see how the Governor responds to challenge, criticism, or alternative perspectives on another of those highly complex and uncertain issues –  appropriate bank capital requirements).

But this line is really used to buttress a rather silly line the Governor has run on a few occasions about the (alleged) dangers of the markets paying too much attention to trying to guess what the Bank is up to, in turn (allegedly) reducing the information the Bank itself can get from market prices.   This is, we are told, one reason why it is just fine for the Bank to do things that take markets totally by surprise (notably, the 50 basis point OCR cut in August).

It really is a nonsense argument, even if he can find a couple of footnotes to attempt to buttress his case. In fact (and in effect) he more or less concedes later in the speech when he highlights things like falling medium to long-term inflation expectations (including from the indexed bond market –  a welcome Hawkesby innovation to have the Bank even acknowledge the indicator) that were concerning the MPC when they made their decision.  Almost certainly those indicators –  eg from 10 year bonds – would have been just as they were whether markets thought the Bank was going to cut 50 bps in one go, surprising almost everyone, or (say) spread the cuts over two 25 bps cuts.

I’m not one of those who think that monetary policy decisionmakers should always deliver on market expectations. But usually if market expectations are very wrong (not –  eg –  just 10 expected a cut, 12 expected no change) it is the fault of the monetary policy decisionmakers themselves.   In those circumstances, they add noise and volatility that is simply unnecessary and has no redeeming societal merit.

And as I noted at the time of the August MPS, the 50 point cut looked a lot like a rather rushed last minute decision, that wasn’t really supported by other the numbers (they themselves produced) or the MPS text.

And what makes it a bit more concerning is that it is pretty clear the Bank itself wasn’t intending to move by 50 basis points even a few days ago.  The projections they published yesterday were finalised on 1 August (last Thursday).   On those numbers, the projections for the OCR (quarterly average) were:

September quarter 2019    1.4 per cent

December quarter 2019     1.2 per cent

March quarter 2020            1.1 per cent

With the next OCR review in late September and the following one in md-November, those projections –  adopted by the whole MPC – clearly envisaged not getting to a 1 per cent OCR even by the end of the year.

The bulk of the Monetary Policy Statement itself is written in the same relatively relaxed style, with no hint of a change in policy approach, and thus no proper articulation of the reason for it, or (hence) for how we should think about how the Committee will react, in principle, at future OCR reviews.   The Bank has added to uncertainty around policy, not reduced it.    In a similar vein, there is a new two page Box A in the statement on “monetary policy strategy”, intended to run each quarter, which is so general as to add nothing to the state of understanding of what the MPC and the Bank are up to.

And you will look in vain for any real insight from the minutes of the MPC meeting.   We are told

The members debated the relative benefits of reducing the OCR by 25 basis points and communicating an easing bias, versus reducing the OCR by 50 basis points now. The Committee noted both options were consistent with the forward path in the projections. [a claim that demonstrably isn’t true –  see above] The Committee reached a consensus to cut the OCR by 50 basis points to 1.0 percent. They agreed that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives.

But nothing about the considerations Committee members took into account in belatedly lurching to a 50 point OCR cut, or how they think about the conventions and signalling around using 25 point moves vs 50 point moves (when things aren’t falling apart here –  and it was the Governor yesterday who announced, oddly, of New Zealand that “the country is in a great condition”).

That wasn’t good or effective monetary policy communications.  It wasn’t a transparent insight on how the Committee is operating, the sort of reaction functions members are using, their view of MPS reviews vs the other OCR reviews.    It was –  or came across as –  a lurch (even if, like me, you thought that the OCR needed to come down quite a bit, quite quickly).

I’m going to end with two more examples of a lack of serious transparency.  Near the end of his speech Hawkesby observes

There are plenty of communication challenges ahead, especially if monetary policy in New Zealand moves into a less conventional territory, and we end up adopting new tools and approaches.

These will need to be explained clearly to both financial markets and the people of New Zealand.

No doubt, but would be an open and transparent central bank, wanting to build and maintain confidence in (a) its potential instruments, and (b) its actual decisionmakers and their advisers want to be much more open than the Reserve Bank has actually been?  Wouldn’t discussion documents outlining potential issues and options be a good idea?  Wouldn’t seminars and workshops with outside experts and market participants be a good idea?  Apart from anything else, at least in principle (as the Assistant Governor said) the Bank learns something from such engagement, challenge, and critique and in the process improves its own understanding and analysis.  It isn’t as if anyone is suggesting they pre-commit to when particularly instruments might be used, so this stuff shouldn’t really be market-sensitive, but it is quite important, potentially to us all (and was we know the Bank’s own research capability has been gutted this year).  And it isn’t as if the Bank’s background analysis on other matters –  bank capital again –  should fill us with confidence and willingness to simply “trust us, we know what we are doing”.

And on a smaller note, the next Monetary Policy Statement  and OCR decision is on 13 November.  As the Assistant Governor highlighted, inflation expectations are quite a significant influence in Bank thinking at present (rightly or otherwise).  And yet the main inflation expectations series –  the two year ahead measure in the Bank’s own survey –  isn’t scheduled for release until 12 November.   I participate in that survey.   Responses were due by midday last Tuesday (22nd). It is an electronic survey and if the results are not already in the Bank’s hands, they assuredly could be (it is pretty simple survey with fewer than 100 respondents, taking a matter of hours to compile at most).  And yet the Bank is sitting on this information until the very last minute.  By the time we get it, their decision will have been all-but-finally made, their MPS document completely written. If they were really serious about the desire to listen and learn, from markets, commentators, nay even “bloggers”, they’d have made sure the information was compiled and published quickly, allowing the Bank itself to listen to the response of outsiders in processing the significance of such important (to them) economic data.

If they were really serious…..instead, they mostly seem interested in fending off critics and keeping to themselves the stuff they know, while distracting us with their transparency about the stuff they don’t know much about at all (and where most central banks have not thought it advisable to follow the New Zealand lead).

 

 

Disagreeing with Lord King

Mervyn King was successively chief economist, Deputy Governor and Governor of the Bank of England over 20+ years.  Now in private life, with all the honours the UK can bestow (as Lord King, and a Knight of the Garter). he periodically offers his thoughts –  lucidly, rigorously, and respectfully (a model, in that regard, for any central bank Governor) – on various economic policy issues.   There was. for example, his book The End of Alchemy a few years ago (which I wrote about here).  There is a new book, with another respected UK economist John Kay, due out early next year.

Over the weekend, at the IMF/World Bank Annual Meetings, King delivered the prestigious Per Jacobsson Lecture in Washington DC (video rather than lecture text).  His lecture has had quite a lot of media coverage (for example here), with an emphasis on the idea that we are “sleepwalking towards a new crisis” and with various ideas and emphases for reform.

There are things to agree with and to disagree with in the lecture. He is clearly right to be expressing concern about the likely economic and political consequences of any new severe downturn, with little conventional monetary policy capacity at the disposal of the authorities. If/when such a downturn happens it is going to be very difficult to navigate successfully.  That message needs to uttered loudly and often, to alert the public and (perhaps) galvanise some policymakers.

Where I’m rather more sceptical is around Lord King’s expressed enthusiasm for the idea that the disappointing growth performance over the last decade or so is primarily a problem of a shortfall of demand.  Of course, it is likely that there is a demand (and monetary policy) element to the story –  in most places, inflation has undershot targets and as central banks (and markets) have been repeatedly surprised by the fall in market interest rates, they’ve had a bias to hold policy rates higher than they probably should have been.

But King’s story is a much more radical one than that.

One of the ways he set up his story was by analogy with the last great period of macroeconomic disappointment, the Great Depression.   He notes that in most advanced countries now real per capita GDP is well below the level implied by the trend in the decades running up to 2008.  Here is a New Zealand version of the sort of chart he has in mind.

King NZ

And then he moves on to assert (a) that similar charts could have been produced in the mid-late 1930s, extrapolating trend growth in real per capita GDP for the 20th century up to the Depression and yet (b) by 1950 actuals had returned to the pre-Depression trend.  So, he argues, we should not jump too readily to the conclusion that what we are seeing now is fundamental, grounded in supply-side problems.  It might simply be an insufficiency of demand and with the right policies we too might find ourselves, 20 years on from the 2008/09 recession, back on the long-term trend line.

King’s story of the 1930s holds very well for the United States, where (for example) the unemployment rate was savagely high throughout the 1930s (a notable contrast to the situation today).   I’ll illustrate that in a moment. But it isn’t a story that generalised even then.  Here, for example, is UK real GDP per capita for the first half of the 20th century.

king uk.png

The first few decades of the 20th century hadn’t been great for the UK, but then the UK experience of the Great Depression was fairly mild and by 1937/38 the economy was running above the pre-Depression trend (and remained so all the way through to 1950).

Rather than illustrates dozens of different countries, in this chart I’ve shown the situation for the US and for Maddison’s grouping of 12 larger Western European countries.

king us.png

You can see King’s point very starkly for the US, but for the Western Europe grouping it isn’t there at all – the picture is more like that for the UK (above).   (For what it is worth, New Zealand was also above the trend line by 1937/38 –  a overheating economy running towards a fresh crisis –  and Australia was a bit below its pre-Depression trend line.)

So the general story just doesn’t seem to stack up very well at all.  There were significant demand (and monetary issues) associated with the Great Depression, but mostly they were dealt with within a few years.  The US was the glaring outlier –  a country that then managed to have another pretty severe downturn in 1937/38 as a result of its own demand (mis)management choices.

As is now widely recognised, global productivity growth has slowed very substantially.  Here is one illustration, using the OECD’s multi-factor productivity data for 23 OECD countries (the “older” OECD countries –  none of the former eastern bloc OECD members are yet included).   I’ve calculated rolling 10 year average growth rates for each country and then taken the median of those growth rates.

king mfp

Being a median measure, you can tell that almost half these advanced countries had (typically slightly) negative annual average MFP growth over the last decade. In the decade to 2007 (say) only two did.

By contrast, here are leading economic historian Alexander Field’s estimates for multi/total factor productivity in the US in decades past.

The period when overall economic activity lagged behind trend so badly, which pretty much everyone agrees was largely down to demand shortfalls, was also the period of very strong underlying TFP growth.

In a similar vein, here is table from a 2013 CBO report on TFP growth in historical perspective (which also draws on Field).

king us 2

Historical estimates get reworked, and I’ve seen some revisions to some of these numbers. But they don’t change the story of strong underlying TFP growth in the 1930s –  all it took was enough demand to translate those new possibilities into higher per capita GDP (back to the longer-term trend line in the charts above).

What about other countries?  Here is chart from a speech given a couple of years back by the Bank of England’s chief economist

king UK mfp.png

It is harder to read, but there is no sign of any slump in TFP growth in the 1930s there either (then again, as illustrated above, demand didn’t look to lag badly for long at all in the UK).

There is a story, that King also tried to tell, that somehow the incipient productivity gains now simply can’t be realised –  let alone translated into higher GDP per capita –  because the demand isn’t there and because of heightened policy and trade uncertainty.  But that doesn’t ring true either.  After all, equity markets have been strong, real borrowing costs have been low (unlike the 1930s), and –  if anything –  the IMF is worrying about corporate sector overborrowing and vulnerabilities associated with it.  That borrowing might not have been funding much new investment, but business credit conditions haven’t exactly been very tight for years now.

And as for uncertainty, yes we all now that the general policy and trade policy indexes are quite high at present, but (a) trade policy uncertainty has really only become a big issue since the start of 2017 and the economic underperformance was well in place before then, and (b) consider the 1930s…..the demise of the Gold Standard, ongoing sovereign debt defaults (including the US and the UK), Smoot-Hawley and all the associatred/subsequent trade protection, the rise of Hitler, Japan’s invasion of China, the growing fear of war.  I’d have thought all those made for much greater uncertainty than we see today, but even if you read things differently, it was hardly a decade that made for a stable and certain political or business climate.  And yet…..consider the realised TFP growth, consider (outside the US) the return to pre-1929 real GDP per capita pathways, contrast it with what we’ve seen in the last decade, and you should doubt that the 1930s provides much useful insight on our current situation.

I don’t have a compelling story for why the productivity slowdown has been so stark and sustaine among countries at or near the frontier.  But a demand-based story doesn’t yet seem very credible, and if such a case is to be made it is going to need to rest in argumentation, theory and evidence, based on something other than parallels with the 1930s.

(And, of course, whatever the frontier story none of it should be of much relevance to New Zealand, starting from average productivity levels so far behind those of the frontier economies.)