The new Monetary Policy Committee’s MPS

I agreed with the bottom line policy decision yesterday of the new Monetary Policy Committee (it was “unanimous” the Governor twice told us yesterday, even though their charter tells them to aim for consensus not for a vote).  Cutting the OCR looks, with the information to hand now, to have been the right thing to have done (although, as always, only time will give us a better sense as to whether it was in fact the best choice).

But, as a rather portentous (but also somewhat empty) recent Bulletin article reminded readers, there is more to the responsibilities of the Monetary Policy Committee than the succession of OCR decisions.    And on their first outing yesterday I don’t think they were performing that well.  It is early days of course –  three new externals (one of whom wasn’t even there for this round), and two internals who’ve both been in their new roles for less than two months. But there is a (very) long way to go if they are serious about the aspiration the Governor sometimes runs about being the best central bank.

Getting some basic facts right would be a helpful start.  For example, I heard the Governor on Radio New Zealand this morning talking about business investment, and suggesting that it was high but not rising.   Here is a chart showing non-housing investment, and the best proxy for business investment (total less housing less government) as a share of GDP (and recall that GDP growth itself has been slowing).

bus I may 19

Doesn’t look very high to me.

Or there was the exchange in the Governor’s press conference when he was asked about the persistence of low nominal interest rates and whether this was some sort of “new normal”.   There are all sorts of possible, reasonable, answers to that one, but the Governor’s answer wasn’t one of those.  He suggested that what we have now is a return to some sort of “old normal”.   To be sure, real interest rates were at times materially negative in the periods (70s mostly) when inflation was very high, but the Governor explicitly claimed to be referring to an earlier period.  Here is a chart from yesterday’s Martin Wolf column in the Financial Times.

long-term rates UK

The Governor also seemed rather cavalier (again/still) when asked about the limits of conventional monetary policy.  He waves his hands, talks expansively of all sorts of other tools, and yet never once mentions that the countries that reached the limits of conventional monetary policy in the last downturn mostly had very subdued recoveries –  and there is a reasonable argument that with more monetary capacity fewer people would have been unemployed for as long as they were.

In the document itself there were also various odd or questionable bits.  The downside risks to the world economy seem to have played a large (surprisingly large) role in yesterday’s decision, but I was left wondering about the supporting analysis when I read this in the document.

New Zealand has become more exposed to international shocks over time as our global economic links have strengthened. Structural changes since the 1980s, such as the liberalisation of trade and capital movements, have increased our exposure to international economic conditions.

What can they have in mind?   Foreign trade as a share of GDP has been shrinking this century, foreign investment has been subdued, immigration has almost always been important in modern New Zealand history, and external indebtedness as a share of GDP hasn’t risen for decades (even if the composition has shifted from public to private) and is materially lower than it was 100 years ago.  And, on the other hand, we’ve had a floating exchange rate since 1985 which acts as a semi-automatic buffer to many global shocks.

Then there was what looked a lot like a (questionable) bid for the government to increase its own spending.  In the press conference, the Governor disavowed any suggestion of wanting more government spending as a cyclical stabiliser, but in the minutes (the new element of the document) we read this (emphasis added))

The members acknowledged the importance of additional spending from households, businesses, and the government, to meet their inflation and employment targets.

(Rather weird framing to suggest we all need to spend more.)

And

A potential source of additional demand discussed by the Committee included government spending being higher than currently projected, in view of the current strength of the Crown balance sheet.

Since there has been no suggestion from the government that it might depart from its Budget Responsibility Rules  (so the MPC isn’t responding to something in the wind) it looks strange for them to have chosen to include these lines (it is quite simply a choice).

The Governor’s own (apparent) left-wing pro-government biases also seemed to be on display in discussing existing government policy.  There was a whole paragraph about how government fiscal policy would be boosting GDP, and that paragraph ends with the observation that

announced minimum wage rises are expected to support household consumption over the projection period

No analysis was presented in support of this claim, and there is no discussion at all of the possibility that much higher minimum wages might have adverse employment effects.  Readers are just left to suppose it is all good.

The Bank is relatively upbeat in its GDP forecasts (quarterly growth rates averaging 0.8 per cent for the next couple of years) and one explanation appears to be their view of KiwiBuild.   The document notes that KiwiBuild is “assumed to contribute to residential investment from the second half of 2019”, and even though population growth is slowing, credit constraints appear to be tightening, and nothing new has been done to free up land-use regulation, the Bank expects to seeing residential investment rising as a share of GDP.

Readers may recall that at the time of the last MPS the Bank released a background note on its KiwiBuild assumptions.  I took them to task then over the unrealism of assuming that KiwiBuild would represent a material net addition to building activity (and that was before the growing questions about the KiwiBuild programme itself).  As I noted then

On my story, there could be as many builders and associated tradesmen and labourers as you like –  resources flowing easily, with high elasticities, into building as required, with barely any change in prices –  and over any reasonable horizon (say, five to ten years) a credible government announcement that it will build 100000 more houses will, to a first approximation, reduce the construction of other houses by 100000 over that period.    It almost has to be that way because:

  • announcing that as a government you are going to build lots of houses doesn’t change land use law or land availability.  It is what it is –  whether in Auckland or elsewhere.  Everyone recognises that (artificially regulated) land scarcity is a huge component in the high cost of New Zealand houses.   Other government policy measures may yet act on the land use issues, but this is a debate about KiwiBuild, in the existing regulatory system,
  • announcing that you are going to build lots of houses isn’t likely to materially alter the price of building materials in New Zealand, and
  • it isn’t going to materially alter regulatory approval timeframes and related things that (for example) affect financing costs.

In other words the marginal supply price of a new residential property –  like for like in its features –  doesn’t change.    Fix those things and there will be more effective demand for houses from the existing (and projected) population: building activity could really step for quite a while (and some of those capacity constraint and resource pricing issues could be relevant for a few years).    But if you don’t change any of those things –  and KiwiBuild doesn’t materially change any of them –  you’ll end up with no more houses, unless (and only to the extent) that the government-sponsored construction doesn’t cover true costs, and effectively offers a subsidised entry to the market for the favoured few.  Even then, the effect will mostly be to drive out more private construction, but there might still – at least for a time –  be a net increase in the housing stock.

I stand by those propositions, but the Bank appears to continue to assert/assume that KiwiBuild will be lifting economic activity.  Perhaps they are right, but they need to offer more analysis that a single sentence assertion.

Productivity isn’t one of the things the Reserve Bank can do anything much about (on that note, I really welcomed an interview yesterday in which I was being asked about the economy and the Bank, and when I mentioned the underwhelming productivity record the non-specialist interviewer responded “And the Reserve Bank can’t do anything about productivity, is that right?”).   But the Bank’s view on productivity growth affects its forecasts of headline GDP growth, which in turn are grist to the political mill.

Like Treasury, the Bank’s forecasts have been repeatedly upbeat and repeatedly wrong about productivity growth.  They always assume it is just about to pick up again.

In the Bank’s case the story is muddied because the variable they publish forecasts for is “trend labour productivity”.  On this measure – definition unclear –  we have had labour productivity growth averaging 0.8 per cent per annum for the last six years, and over the forecast horizon (to 2022) that is expected to increase to 1.1-1.2 per cent per annum.  There is never any discussion as to how or why this increase is expected to occur.

But lets look at a hard, easily replicable, measure of economywide labour productivity growth.  In this chart I’ve used the average of the two measures of GDP (production and expenditure) and the average of the two measures of hours (HLFS and QES) to derive an estimate of growth in real GDP per hour worked.  We have hours data up to and including the March 2019 quarter, and I’ve used the Bank’s forecast for GDP growth in that quarter (0.4 per cent).

GDP phw may 19

The orange line is the average for the last five years.  There has been almost no productivity growth at all.  Nothing in the data, or in government policy such as it is, suggests that is about to improve materially any time soon.  With little or no productivity growth it would be surprising indeed if annual GDP growth is anything like 3 per cent.

(And yet none of this stops the Governor burbling on about global inflation being low because of positive global productivity shocks.  The rest of the world’s story isn’t as bad as New Zealand’s, but it is hardly a story of strong and robust productivity growth.)

I was puzzling a bit over the MPC’s apparent interest in increased government spending.  Looking through the detailed spreadsheet of forecasts the Bank publishes I found they had forecasts for a variable they call “government spending (including non-market investment)”.  Out of curiosity I averaged the quarterly growth rates over the period from when the current government came to office (their first full quarters was q1 2018) to the end of the forecast period in 2022.  Recall that the Bank uses the government’s announced plans for their fiscal numbers.  Real government spending over the 4.5 years to mid-2022 is forecast to increase by an average 0.5 per cent per quarter.  Still curious, I calculated the average for the previous 4.5 years, under the previous government, and it was 0.7 per cent per quarter.  I don’t have a strong personal view on the appropriate level or rate of growth of public expenditure, but as a detached observer I’ve always been a bit puzzled as to whether left-wing voters really wanted to elect a government that would have government spending (share of GDP) so similar to that of the previous government, and growing more slowly.

As I mentioned the Governor has tended to talk up the New Zealand economic story, including around business investment.  But here, from the same forecast tables, are the Bank’s projections for average quarterly growth in the volume of business investment and the volume of exports.

lab govt

Not, among other things, the sort of picture one might expect to see if productivity growth were really about to accelerate.

My overall summary?  The OCR call was correct, but little about the analysis or communications the Bank has presented gives one much confidence in our central bank having a good understanding of the economy and its challenges, or the willingness/ability to communicate in a well-grounded dispassionate ways that genuinely sheds light on the issues.  The new MPC is still finding its feet –  one reason why I put little weight on yesterday’s projections as a guide to how things will unfold over the next few quarters –  but there is a big challenge ahead of them.

Economic expectations

The macroeconomic news of the day will be around the Reserve Bank’s Monetary Policy Statement this afternoon.   But yesterday afternoon the Bank published the results of its quarterly survey of (somewhat expert) expectations.

There wasn’t much newsworthy in the survey results.  Across this group of respondents, the median expectations for the inflation rate two years ahead, five years ahead, and ten years were 2.00, 2.00, and 2.00 per cent. The Bank will be pleased.   Unfortunately for the Bank, market prices (from the market in indexed and conventional government bonds) suggest something close to 1.0 per cent (my own responses to the survey were not that low, but were in the lower quartile of responses).

The questions that caught my eye were those around monetary conditions.  Respondents are asked (on a 7 point scale) how they perceive monetary conditions at present, in three months time, and in nine months time.  It is entirely up to each respondent how they interpret “monetary conditions” –  what weight they put on each of, say, interest rates (short or long), exchange rates, credit conditions, share prices, or whatever.  Here are the summary results

mon con

A huge majority of respondents think current monetary conditions are looser than neutral (“neutral” is the Bank’s own term) and expect them to stay that way.

But the surprise was the shift, expected over the coming quarter, from neutral to tighter than neutral.  Sure, the survey was taken almost two weeks ago, but even then market prices were clearly centred on the prospect of an OCR cut –  whether today or in August – with no commentator I’m aware of expecting an OCR increase.   (And in the same survey three months ago, there was an expectation of a slight shift towards less-tight conditions.)

Who knows what respondents had in mind.  It can’t have been the exchange rate –  the survey asks for exchange rate expectations and they aren’t rising –  so perhaps it was something about credit conditions.  Then again, it is a fairly small sample (33 respondents) so perhaps a couple of people just read the options the wrong way round.

What about OCR expectations themselves?  The survey asks about expectations for the OCR as at the end of June and at the end of March next year.   The median response for June was still 1.75 per cent – no change now or at the OCR review at the end of June –  in a survey taken only 10 days ago.   The median expectation is for only one OCR cut by then , but the lower quartile response is 1.25 per cent, and at least one person (wasn’t me) is picking 1.0 per cent by then.  (On the other hand, at least one respondent thinks the OCR will have been increased to 2 per cent by March.)

And the last result that caught my eye was this one.  Respondents are asked for their expectations of GDP growth for the year ahead and then for the year beyond that.  This chart shows the average of those two expectations.

GDP expecs

The latest results are lower again, and are now at the lowest level since December 2009.   Expectations of this sort aren’t particularly useful as forecasts (lots else will change), and often largely reflect what has already been seen.  And the latest decline isn’t severe in the long-run history of the serious. But it isn’t exactly a rosy picture either.  Respondents don’t see anything on the horizon likely to accelerate growth rates.   All else equal, there isn’t much suggesting core inflation will rise.

There is a pretty good case for the OCR to be lower.  Then again, there was a good case (probably stronger) for a cut to official interest rates in Australia yesterday, and it didn’t happen –  the statement read like a central bank desperate not to cut, despite an agreed inflation target they’ve been badly undershooting.   I doubt our Governor will be desperate not to cut, but whether he and his new colleagues actually do so today we won’t know for a few hours yet.

 

 

Looking to the MPS

I was tempted to write a post about the new head of the Irish central bank, perhaps offering some pointers to my (handful of) Irish readers about the propensity of their new British Governor to speak openly, and typically not in a very robust or convincing manner, about all manner of things, all while the foundations of New Zealand’s economic prosperity –  our dismal productivity record –  were neglected.  No doubt he will be a solid administrator and is a nice guy, but it seems like quite a step down from Governors such as Philip Lane and Patrick Honohan.   That said – and unlike the New Zealand situation – at least the appointment  of the Governor was made by someone (an elected minister) with a democratic mandate.  As for the vacancy in the position of New Zealand Secretary to the Treasury, one can only hope that between the Minister and the State Services Commissioner they come up with a better appointment this time round.  But as I noted earlier in the year after the advert appeared, it is hard to be optimistic.      After all, it isn’t obvious that either the Minister or SSC sees a problem.

But to revert to more-mundane central banking, next Wednesday will see the release of Reserve Bank’s Monetary Policy Statement, the first (and first OCR decision) for which the new statutory Monetary Policy Committee is responsible (rather than the Governor personally).  There will be more interest than usual in this MPS.  In part that is because for the first time in a couple of years or more there is some genuine uncertainty as to what the OCR decision itself (as distinct from the language around it) will be.  But it will also be because of the new Committee and the uncertainty over how it will communicate (we know the minutes will be published at the same time, but don’t know what they will look like, we don’t know whether the MPS itself will look any different (probably not), and we don’t know whether some or all of the external members might start to avail themselves of the opportunity to speak openly (eg that thing called accountability)).

I’m pretty clear that the OCR should be a bit lower.  My reasons for that are straightforward:

  • core inflation is still below the focus of the target (the 2 per cent midpoint) –  has been for years, and any progress back towards 2 per cent seems to have petered out again,
  • market-based measures of medium to longer term inflation expectations are very low (close to 1 per cent),
  • that forces that added to demand growth this decade have more or less exhausted themselves and so there is little reason to expect (as a central view) higher inflation over the next year or two on current monetary policy settings,
  • confidence indicators are weak, output and employment growth have been slowing, and there is little sign of over-full employment, and
  • the global situation offers much the same set of messages (weak inflation, subdued output growth etc, albeit –  at least in some major economies –  with a better unemployment position than we have in New Zealand).

(And all this, even though New Zealand wage inflation –  often characterised as weak –  continues to outstrip growth in productivity and the terms of trade.)

But the focus here is on what the new Monetary Policy Committee might choose to do.

In his final statement as sole monetary policy decisionmaker, the Governor shifted his stance, expressing it this way

The balance of risks to this outlook has shifted to the downside. The risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending. On the upside, inflation could rise faster if firms pass on cost increases to prices to a greater extent.

The shift to an explicit statement of a (net) downside risk –  and thus more likelihood of an OCR cut than an increase in the period ahead – took quite a few by surprise in late March.

My reading of the data is that not much has changed since then. In other words, we have had another month or more of pretty subdued data and no fresh signs that (core) inflation is likely to get back to target.  Against that sort of backdrop, it would be quite easily justifiable to cut the OCR next week –  not necessarily foreshadowing a succession of future cuts, but just to provide a bit more of an underpinning for demand, and a bit more support for getting core inflation back to 2 per cent.

But, equally, it would be mechancially easy enough for the Bank –  having come only lately to recognise the need for a downside risk at all – to simply stand pat.   And, if anything, the Governor was sounding quite unbothered about the “recent slowdown in growth” in an interview with NBR last week.

What the Committee finally chooses to do has to be, more than might usually be the case, anyone’s guess.

For a start, the economic forecasts (that influence and are shaped by) the Committee’s policy preferences must be more of a wild card.  The forecasts will, presumably, be owned by the MPC itself –  not just treated as staff forecasts –  but four of the seven MPC members weren’t involved in the previous MPS and associated full forecast round.  One of the other members will have been, but he is now in a quite different (and vitally important) role as the Bank’s Chief Economist.

And we know almost nothing about the policy preferences, or mental models, of any of the new external members (or some of the internals).  How do they interpret the mandate?  How do they think about the relevance of overseas risks?  How much confidence do they have in the value of economic forecasting at all?   We don’t even know much about the Governor’s own views on such matters because (endlessly repeated point) he has not given a single public speech on monetary policy in his time in office.  Glib one-liners aren’t the same thing at all.

One thing I think we can count on is that there will be no vote, and thus no disclosure in the minutes of any difference of view among the MPC members.  Even if some members aren’t fully happy with where the majority is heading, the Governor is likely to put pressure on the externals not to explicitly dissent –  after all, he and the Minister have championed the “consensus” model, one which strengthens the relative hand of the Governor.  If there was a dissent first time up, that might establish a pattern or precedent that management really wouldn’t want.  As it is, it is hard to believe that any of the externals –  none with a significant background in monetary policy or forecasting –  would be wanting to buck the internal majority anyway, lest of all first time up.

The Governor has spent some time pushing back against suggests that his monetary policy communications has not been good.  In that NBR interview, he claimed again that it it isn’t his job not to surprise markets, and went on to suggest that picking the next OCR call was “barely necessary” and that energy devoted to it might be better devoted to lifting productivity, improving the health system or whatever.  I don’t suppose those comments –  typically glib –  will have endeared him to his critics in the market (eg those reported in the recent Reuters story).     For all his bluster, however, it would be a bit surprising if he wasn’t being advised to avoid further unnecessary controversy over his communications (especially now that, at least in principle, he represents the MPC not just himself).   That doesn’t necessarily determine which way the Bank will go, but perhaps there might be fewer comms risks from cutting now, than risking some sort of whipsaw reaction if they get the messaging wrong around holding fire for now?

One other consideration that may be relevant is the RBA interest rate decision next week.   Markets had swung to the view that the cash rate would be cut when the RBA Board meets on Tuesday –  core inflation is now badly undershooting the midpoint of the RBA target –  and I gather market opinion is now fairly evenly balanced.   (Ten days out from a general election is always an awkward time for monetary policymakers.)  The Reserve Bank of New Zealand MPC will almost certainly make their decision (more or less finally) before the RBA decision is known, but given that the Governor noted in March an unease that other countries easing while we didn’t could put upward pressure on the exchange rate, it might be appealing to him to move now.     If the RBA cuts and he doesn’t, there will be press conference questioning about “why wait?”, and if he cuts and the RBA hasn’t done so, the Governor could look pro-active and responsive.

I mostly don’t do MPS preview posts, and did so this time mainly because I’m interested in the legislative change and the impact/implications of the new system, and the uncertainty the transition generates.  In a poll earlier this week, I predicted a cut but, asked about the strength of my view, described it as a 51/49 call.  I see one of the big banks has just put out a note taking a similar view (55/45). It is easy to say that individual OCR decisions don’t matter that much –  and there is some truth in that, but they set the scene for the next one.  Probably no one can really claim they will be too surprised which way the OCR call goes on Wednesday, and the bigger challenge –  opportunity for getting things wrong –  is probably around the rest of communications (both the wording of the policy statement itself and the credibility of the forecasts, all shaped by new leadership).

There are now seven holders of statutory MPC positions. Not one of whom has made any serious speeches or paper on monetary policy (we know nothing of the views of most them), the Bank needs to be looking to improve its medium-term monetary policy communications quite materially.  It would be an inconceivable situation for most other advanced country central banks –  and those monitoring them –  to find themselves in.

 

 

Lack of transparency and the MPC

The statutory Monetary Policy Committee is now responsible for monetary policy and we’ll see the first fruits of their deliberations in a couple of weeks.   It won’t just be the outsiders who are new, with two of the four internals having also taken up their jobs (in one case, joined the Bank) since the last Monetary Policy Statement.

In addition to the questions about how the Committee is going to work, what approach to policy they will take, whether the Governor remains as dominant as I fear, and whether a new era of greater policy transparency is really being ushered in, there are some other outstanding questions about the Committee.

One of them is how much the external members are getting paid.  The government simply refuses to tell us.  The same government that once promised to be the most open and transparent ever.

There was an article about this in the Herald ten days or so ago.  The government’s standard schedule of fees for appointments to public board and committees allows a maximum fee of $800 a day.  Perhaps $800 a day might, just, be reasonable for a role that involved only, say, 10 days work a year.    But the MPC jobs were advertised as involving about 50 days a year –  a fair chunk of anyone’s earnings potential –  and there are some material constraints on what other activities people on the MPC can do.   $800 a day is probably equivalent in annualised terms to around $175000 per annum.

And so, reasonably enough, the Minister of Finance sought approval to offer a higher rate to those appointed to the MPC, arguing that if more money was not on offer they might struggle to get the “right” sort of applicants.   These sorts of exceptions are made from time to time,

A spokesman for [State Services Minister] Hipkins said in 2017/18, the Government approved 43 “exceptional fee” proposals.

That number was 90 in 2016/17 and 42 in 2016/15.

The suggestion in the article is that the government may be paying up to $1500 a day to the MPC appointees

The letter also said the most comparable role within the state sector would be a member of the Commerce Commission, who earns a salary equivalent to a daily fee of $1565.

$1500 a day might be equivalent to an annualised rate of around $330000 per annum.

I don’t too much problem with that level of fee, provided the MPC members are going to do the job well, and not just become free-riders largely deferring to management.

After all, consider what the internals on the committee are getting paid.   Going by the remuneration tables in the Bank’s Annual Report, they probably get something like this:

  • Governor                                                                                    $700000
  • Deputy Governor and Head of Financial Stability,            $500000
  • Assistant Governor (Econ and Financial Markets)             $425000
  • Chief Economist                                                                         $325000

The Deputy and Assistant Governor roles are both second-tier appointments, while the Chief Economist is a third-tier role.

Of course, academics get paid less well than this (and two of the three external MPC appointees have academic backgrounds) but the private financial sector pays able economists well.

Another possible benchmark is the $447000 per annum paid to High Court judges.  We need skilled and capable people performing those roles, but there are potentially two layers of appeal above a High Court judge, and none at all above the (collective) decision of the MPC.

But if I don’t have a problem paying a reasonable price for the job, I do have a problem in not disclosing what these decisionmakers are getting paid.   You can readily see from the Annual Report what each member of the Reserve Bank Board gets paid (not that much, but then they don’t do much), and the mandatory disclosure (without names) of all salaries in excess of $100000 gives one a reasonable sense of what the senior managers involved are being paid.   But the government insists that the external members’ fees should remain confidential.  Their argument?

“This is on the basis that it could weaken the Government’s ability to negotiate fee levels by creating an environment where the exceptional fee becomes the norm.”

I don’t find that persuasive, and the secrecy is inconsistent with the sort of openness and transparency we should expect around public appointments.  Frankly, it suggests the government has its fee schedules in the wrong place, at least for substantive roles.

Perhaps the closest parallel to the external MPC members are the comparable positions in the UK.  In fact, the Minister of Finance cites them in his bid to get higher fees for the New Zealand appointees.  But the terms of conditions of UK MPC members are available for all to see.   As the Minister noted

It also noted MPC members at the Bank of England receive around $1900 in New Zealand dollars.

“Reserve Bank of New Zealand external MPC members will require similar economic and analytical skills, although their role is likely to be less public facing,” Robertson said in the letter.

If it is good enough for the UK, not always known for its public sector transparency, it should be the standard of openness we expect here.

There are also some questions around the transparency of the MPC appointment process itself.

As I noted when the appointments were made

But then I’m a bit troubled by the way in which the Board –  all but one appointed by the previous government – ended up delivering to the Minister for his rubber stamp a person who was formally a political adviser in Michael Cullen’s office when Cullen was Minister of Finance (Peter Harris) and another who appears to be right on with the government’s “wellbeing” programme.     They look a lot like the sort of people that a left-wing Minister of Finance –  one close to Michael Cullen –  might have ended up appointing directly……

I’m left wondering what sort of behind-the-scenes dealings went on to secure these appointments. I hope the answer is none. I’d have no particular problem if, while the applications were open, the Minister had encouraged friends or allies to consider applying. I’d be much less comfortable if he had involvement beyond that, prior to actually receiving recommendations from the Board. It isn’t that I disapprove of politicians making appointments, but by law these particular appointment are not ones the Minister is supposed to be able to influence. So any backroom dealing is something it is then hard to hold him to account for. Perhaps nothing went on, but I have lodged a series of Official Information Act requests with the Minister, Treasury, and the Board of the Bank about any contacts (written or oral) between them on this issue.

Since the Act is written in a way that encourages the public to believe that the first time the Minister would even hear of any potential MPC members would be when the nominations landed on his desk from the Board (which he could accept or reject, but not impose his own candidate), the response from the Minister of Finance to my OIA request should have been quick and simple.

Here was my request to the Minister.

I am writing to request copies of all material (written and oral) held by you or your office relating to the appointment of members of the Reserve Bank Monetary Policy Committee.  Without limiting that request, it includes a request for any information relating to any approaches made by you or on your behalf (a) encouraging specific individuals to apply, (b) encouraging the Bank’s Board to nominate or select any particular individual(s), or (c) discouraging the Bank’s Board from nominating any particular person or type of person.

In subsequent contact, it was agreed I wasn’t looking for purely adminstrative stuff (emails like “does anyone know if Bob Buckle has signed hs contract yet?”).

The request was lodged on 29 March.  I had a letter from the Minister last week extending my request to 11 June (so not just 20 working days, or even a 20 working day extension, but a bit beyond even that).  And the justification?  The claimed need to “search through a large quantity of information”.

That certainly does not suggest a Minister of Finance who had taken the sorts of hands-off approach his own brand-new legislation appeared to envisage.  In that case, there would have been nothing to find, nothing to search.  The Minister would have known there was nothing.

In principle, I’m not averse to the Minister of Finance having an active role in such appointments.  In my submission to FEC last year on the amendment bill, I argued that the Minister should have the power to appoint directly (as is typical with most other public appointments, and most other central banks roles in other countries).  The MPC is a major element in short-term economic management, and we expect to be able to hold the minister to account (we can vote against his party, but have no clout over central bankers).  Try to appoint a party hack and expect blowback in public or Parliament.   But the Minister and the Select Committee chose to reject that proposal, and to use the model –   in place for the appointment of the Governor –  in which, on paper, the Minister has no role other than to accept or reject a final recommendation.

It looks as though what we are left with is the worst of both worlds.  The Minister of Finance isn’t keeping out of the process, until the end when he says yea/nay to formal recommedations, but whatever his active involvement it is behind the scenes in ways which make it hard to hold him to account (if second XI type people, or people with strong ideological affinities to the government end up appointed, he can simply say “it was the Board that handed me these nominations”).    It seems to be neither open nor transparent.

I hope that when the Minister finally gets round to responding to the OIA request, the evidence will suggest these concerns are overstated.  But, on what we have to date, the indications aren’t promising.

Transparency was to have been a key aspect of the Reserve Bank reforms.  To date, that is looking patchy at best, around such basics as remuneration and appointment processes.  We can only hope – against hope –  for better on policy and policy communications.

 

 

Critics of the Governor

There have been a couple of media stories this week that were less than flattering about the Governor of the Reserve Bank, Adrian Orr.  I was going to say “new Governor”, but checking the calendar I see that in another month or so he will be a quarter of the way through his first term.

The first story was by Stuff’s Hamish Rutherford, and centred on the Governor’s plan to require banks to greatly increase the share of their assets funded by equity rather than debt.   In the on-line version of the story, Orr is labelled “Mr Congeniality”.  The story begins this way

Since Adrian Orr became Governor of the Reserve Bank of New Zealand he has built a reputation of being someone who likes to be liked.

Charming and jocular, but possibly sensitive to criticism.

But Orr is now in a battle with the bulk of New Zealand’s banking sector in a way which could see him demonised, probably with the focus on lending to farmers.

He knows it. Recent days have seen Orr on a campaign to explain itself.

I’m not sure he seems any different as Governor than he ever was before –  his well-known strengths and weaknesses have continued to be on display.

I’ve written quite a lot here about the substance and process around the Bank’s capital proposals – starting with the apparent lack of consultation and coordination with APRA, through to the weaknesses of many of the arguments the Bank advances, the lack of apparent understanding of how financial crises come to occur, the grudging and gradual release of further supporting material, and (presumably partly as a result) two extensions to the deadline for submissions.

In the article Orr is quoted thus, in perhaps the understatement of the week

The consultation process, in Orr’s words “could have been tidier”.

Done properly there would have been extensive workshopping of the technical material over months before the Governor ever put his name to a specific proposal.   As it is, we have a half-baked proposals, not benefiting from any prior scrutiny, and yet the same Governor who put the proposal forward is now judge and jury in his own case, with no effective rights of appeal for anyone.    And there is big money involved –  not just the additional capital that might need to be raised, but probable losses in economic output that will affect us all to a greater or lesser extent.

Presumably no one in the industry would go on record for Rutherford’s article.  Not upsetting prickly Governors is an art the banks have sought to master (even when it involved pandering to an earlier Governor who wanted a senior bank economist censored), although presumably the banks’ submissions will be fairly forthright.  (But will the public ever see those submissions?)

But some of the tone of the off-the-record concern is there in the article

Sources across several of the major banks are warning that if the bank pushes ahead with its plan it could act as a significant constraint on lending to farmers and small businesses,  sectors which are as economically important as they are politically sensitive

Both sectors are considered risky and when capital requirements go up the impact will be magnified.

Why those sectors?  Well, the “big end of town” (Fonterra, Air New Zealand or whoever) will have no difficulty raising debt either directly (bond market) or from banks that aren’t subject to the Reserve Bank’s capital requirements (which means every other bank in the world not operating here, as well as the parents of the locally-incorporated banks operating here).  And the residential mortgage market is both pretty competitive (including from some local institutional players that are less badly hit by the Governor’s proposals than the big banks), and more open to the possibilities of securitisation (which would then avoid the capital requirements too).   Idiosyncratic small and medium loans (including farm loans) aren’t, and farm loans in particular require a level of industry knowledge that newcomers won’t acquire easily (and offshore parents often won’t have).

Perhaps these effects will be large, perhaps they will be quite moderate in the end. But the point Rutherford didn’t make, but could have, is that none of this was analysed in the Bank’s consultative document.   When a really major change is proposed we should surely expect a serious analysis of transitional paths (not just for the banks, but for customers and the economy) as well as the long run.  But there was almost nothing, and nothing in any more depth has emerged in subsequent material that has seeped out.

It simply isn’t a good policy process, and that should concern both the Minister of Finance (and his advisers at The Treasury) and the Bank’s board.   The Governor simply isn’t doing a good job on this front.  If there is a compelling case for what he proposes, he hasn’t made it.  And that is almost as bad –  in a serious independent regulator –  as not having a good case in the first place.

The second article was by the news agency Reuters.   The focus in that article is Orr’s conduct of monetary policy, and particular his policy communications (which many had expected to be one of his strengths).

There are at least two strands to the article.  There are criticisms of Orr for not yet having given a single substantive on-the-record speech on either of his main areas of policy responsibility (monetary policy and financial regulation).  I’m among those quoted

Michael Reddell, an ex-RBNZ official who served with Orr on its monetary policy committee in the 1990s and 2000s, is critical of Orr for not giving a “substantive” speech on monetary policy in the past year.

“It would be unthinkable in Australia or the United States or even under previous governors here.”

I’ve been more and more surprised at the omission as time went on.  And in respect of monetary policy it is not as if there has been much from his offsiders either.  Sure, we get the rather formulaic paint-by-numbers Monetary Policy Statement every few months, but it simply isn’t the same as a thoughtful carefully-developed speech –  which shows more of how the individual/institution is thinking, and the omission has been particularly significant given that we had a new Governor and a refined mandate.

Orr’s response to this criticism is reportedly that it is “thin”.   Whatever that means, the fact remains that in other countries top central bankers talk, quite frequently, about their thinking in on-the-record speeches.  I’ve suggested, speculatively, that perhaps he doesn’t do serious speeches on core areas of responsibility because he just isn’t that interested (saving his passion for infrastructure, climate change, diversity, and all manner of other stuff he has little or no responsibility for).  I’d  like to be wrong on that, but nothing in this article provides any countervailing evidence.

But the bigger criticism in the Reuters article appears to come from financial market participants, concerned that they aren’t able to read the Governor’s policy intentions well.

Many traders who spoke to Reuters in the past two weeks blame Orr for confusing the message, and some have even been critical of frequent references to legends of the indigenous Maori people in his speeches, saying they served little purpose for financial markets eager for more policy clues.
“I am extremely frustrated at the lack of communications for global market participants,” said Annette Beacher, Singapore-based macro-strategist for TD Securities.
“Since Adrian Orr has assumed the role, he’s managed to surprise the market every six weeks. We don’t hear anything from him in between policy decisions,” Beacher said, echoing similar complaints from others.
“So what do I recommend to my trading desk? I’m saying trade the data but we’re not quite sure what is going to happen at the next meeting. It’s not meant to be this way.”

Here, to be honest, I’m not sure quite what to make of the criticism (I mostly don’t hang out with international markets people).   I’m sure there is a great deal of eye-rolling at the tree god nonsense that Orr continues to champion, but perhaps here the longstanding central banker in me comes out and I wonder if the offshore market people aren’t being a little precious.    Markets should not need their hands held to anything like the extent some of the comments in the article suggest, and if there is a little noise in market prices as a result that isn’t necessarily a bad thing.

It seems that quite a few people the journalists talked to were grumpy about the move to an explicit easing bias at the last OCR review, I couldn’t help wondering how much of that was a disagreement with the Governor’s stance (market economists on average have been more hawkish than the Bank for years, and have been more wrong) and how much a sense that a forthcoming change hadn’t been signalled.  I was bit (pleasantly) surprised myself by the move to an easing bias, but mostly because I thought the Governor wouldn’t want to launch a change of direction days before the new MPC took over.  Perhaps that is one of the circumstances in which advance signalling  might have been appropriate?    And perhaps the two strands of concern come together here: we shouldn’t have the Governor or senior staff giving private previews to select contacts about their evolving thinking.  So it has to be serious interviews or serious speeches –  and, as Annette Beacher notes, we haven’t really had either.

The Bank has probably also suffered somewhat from being in transition. At the start of last year, they lost the ultimate safe pair of hands, longserving Deputy Governor Grant Spencer.  A new top-team took over, and within a few months Orr was restructuring, which included demoting longserving chief economist John McDermott.  He lingered for a few months before leaving entirely, but can’t have been entirely engaged.  The head of financial markets was also ousted, and it was only in late March that the new recruits started to take office.  As I’ve noted previously, on the monetary policy side of the Bank it is very much a case now of a Second XI at play (internals and externals) and there is now quite a challenge in getting communications onto a steady, sustainable, and functional path.   The goal shouldn’t be keeping overseas economists happy, but it is perhaps telling that Reuters couldn’t find a domestic one willing to go on the record defending the Orr approach.

What of the Governor’s response to all this?  I’ve already recorded his response to the concern about speeches.  Here is some of the rest of what he told Reuters

In an interview with Reuters earlier on Tuesday, Orr said he wants to reach out to a wider audience than just currency traders, analysts and bloggers.

“The broad audience for this bank is the public of New Zealand. We are seen as a trusted institution but they don’t know what we do. So that is my communication challenge,” he said.

Orr also defended the Maori references in his speeches as part of the bank’s efforts to reach out to wider groups.

“Metaphors have their limits and metaphors can be over used. I get all that, but metaphors need to be introduced and created sometimes.”

I quite get that he wants to communicate to people beyond just the likes of Annette Beacher or me.    But it is not much short of populism to pretend that the audience of people who do pay close attention to the Bank, and know something about it and other central banks (and can even think through the aptness or otherwise of his metaphors), don’t matter.  He can try to appeal over the head of the relatively knowledgable all he likes, but I suspect he won’t find many listening.  Most people have better –  more interesting and important to them –  things to do with their lives.  As it happens, the Governor released a while ago a record of which audiences he delivered speeches to last year, and despite all the rhetoric –  tree god and all –   I was a bit surprised by how relatively few and conventional the audiences were.  The only novelty seemed to be a lot of mention of the tree god – cue to eyes rolling from many of the audiences no doubt.   How many more readers, I wonder, have the cartoon versions of the MPS and FSRs won?  How many have tried twice?

There is a “retail communication” dimension to the Reserve Bank’s role –  when you are driving interest rate up (or down) and affecting people’s employment prospects, business profitability etc, you have to explain yourself.  Over 30 years of an independent Reserve Bank, successive Governors have done a great deal of it –  Don Brash almost to the point of exhaustion, in his nationwide roadshows.  But the core of the job is actually rather more “wholesale” in nature.  And the Governor doesn’t seem to have been getting that right –  at all re bank capital, and in some dimensions re monetary policy (I’m probably closer to his bottom line on the OCR than many other commentators).  All this should be a concern for the Minister of Finance, and for the Bank’s Board.

There is still time for the Governor to right the ship –  and perhaps the new MPC will end up helping –  but the signs aren’t good. Only this morning, a press release emerged from the Bank championing the cause of climate change.  Action may well be really important, but it just isn’t the core business –  or really any business at all in a New Zealand context, with the sort of loan book New Zealand banks have –  of the Reserve Bank.  It is what we have an elected government for.

Sadly, we can expect to hear more from the Governor on climate change and his tree god (flawed) metaphor, and there is no sign of any contrition around the lack of serious communication from him on monetary policy or (where he is still sole decisionmaker) financial sector regulation.

 

The Second XI takes charge

The current government –  like its predecessor –  hasn’t done much that’s good.  Neither has done anything to even begin to deal with New Zealand’s longstanding productivity growth underperformance (for the current government, better – apparently – to pretend it doesn’t matter and talk a lot about “wellbeing” instead).

But they have made some modest reforms to the Reserve Bank, which take effect today.   After almost 30 years, the Governor is no longer the sole legal decisionmaker around monetary policy (he remains in sole charge of all the rest of what the Bank does), and a newly-created statutory Monetary Policy Committee has taken over (with surprisingly little media coverage, including no profiles of these new statutory policymakers, who will heavily shape how New Zealand handles the next recession).

Moving to a legislated committee-based system for making monetary policy decisions has been a cause of mine for almost 20 years now. It is the way almost all other major decisions in public life (and much of business and non-profit life) are made, from Cabinet on down to the local school’s board of trustees.  Earlier this decade, I greatly upset the then-Governor by even writing a limited-circulation internal discussion paper proposing such a reform, and first media coverage I had after leaving the Bank was for a revised and updated paper along similar lines.   To their considerable credit –  and I don’t credit them for much –  the Green Party had also been championing reform in this area for some time.  Labour was late to the issue –  and showed little sign of really caring much – but as the largest component of the government, reform wouldn’t have happened without them.

The new model MPC will be an improvement on what went before it. It is good to have it now clear in law that the government of the day sets the target (taking advice, consulting etc, but in the end the Minister sets the target and is accountable for it). And the final form of the new system is a little better than what the Minister of Finance was first promising (MPC members were initially to be prevented from airing their views in open at all), or than the Governor appeared to be championing (when he was reported as suggesting he didn’t want economists as external members of the MPC).

But, to a considerable extent, the reforms represent a lost opportunity.  We’ve ended up with a system designed to be dominated by the Governor, and with not much more openness and accountability than we’ve had before. In practice, it looks likely to be a system little different than the Bank operated since about 2002, when “external advisers” were first appointed to the (then) Official Cash Rate Advisory Committee.   There is little reason to suppose that the policy mistakes of the last decade (recall the enthusiastic rate hikes in 2014 and the reluctant unwinds, and nearly a decade of undershooting the inflation target) would have been avoided if this particular system had been put in place in 2009.

It looks, mostly, like cosmetic change –  cosmetics which suit both Reserve Bank management and the government, neither of whom was interested in the sort of open and accountable, disputatious at times, central banks of the sort they have in Sweden, the UK, or the United States.  It is there in the official documents –  the relentless drive for “consensus”, of which I noted recently

“Consensus” isn’t a recipe for getting the best answers, but for lowest common denominator answers that everyone can live with.  It isn’t really a recipe for a robust examination of competing arguments and analyses either –  at least unless one has exceptional people (which is always unlikely, almost by definition) –  and especially when management has (a) an inbuilt majority, and (b) control of all the research and analysis resources (and of the pen in drafting MPSs etc).

As always, there is the law and there is practice.  It will take some time for the new system to bed down.  Perhaps the published minutes will prove more revealing than currently seems likely. Perhaps MPC members –  internal and external –  will be willing to give periodic speeches and interviews outlining views different from those of the Governor.  Time will tell.  I hope it works better than I expect. But I’m not holding my breath.

The members of the new MPC was finally announced late last week.    Recall that the committee has four internal members and three external members, and hence a built-in management majority.  There is no necessity for the internal members to all vote together (if things ever come to a vote –  recall all that talk of “consensus”), but the internals (in their day jobs) all work for the Governor.   In future, the Deputy Governor will be appointed by the Minister, but only on the recommendation of the Board, who in  turn must consult the Governor (in practice, the Deputy Governor will be the Governor’s appointee).  The other internals will just be senior staff appointed to their positions in the Bank by the Governor, and hoping for pay rises, promotion, resource allocations to their areas, all in the sole gift of the Governor.  A good Governor will, of course, encourage challenge, debate, active disagreement etc etc.  Rather more average Governors –  and the typical Governor is likely to be rather more average – won’t, especially not in public fora.  So although on paper the internal members of the MPC are statutory appointees (in respect of that specific role), they are just part of the Bank’s management structure, and under the old and new law work wholly to the Governor.

And what of the three external members, who were appointed last week?   Notionally, they were appointed by the Minister of Finance –  it is his press release at the link – but in law the Minister (elected by the voters) has little or no say in who serves on the committee that, at least on paper, has the biggest say in cyclical macro management.  The Minister can only appoint people recommended by the Bank’s Board (most of whom were appointed under the previous government).  And the Board –  despite being charged in law with holding the Governor to account – works very closely with the Governor, mostly providing cover and support for the Governor. In fact, the Governor is a member of the Board.    And all the resources of the Board are provided by…..the Governor.   So we can be pretty safe in assuming that no one with whom the Governor is uncomfortable with is ever going to find their way onto the Monetary Policy Committee.        Since this is new legislation, and this feature has been pointed out repeatedly, one can only assume that is deliberate intent.

And if the Board has no independent resources, neither do the external members of the MPC.  This could become a matter of some contention over the next few years.  It did at the Bank of England after their reforms 20 years ago, although since the appointees in the UK system had more independent status (directly appointed by the Chancellor) and were “bigger beasts” with more forthright tendencies, perhaps here the externals will just go along.  They will have no independent research or analysis resources, and no ability to require specific pieces of work to be done by staff.  They will be largely dependent on their own resources, and perhaps any public commentary, while almost always being outnumbered.  It could drive really able people silly, but then actual appointees will have been selected for (probable) docility.

Which brings me to the members of the committee themselves, who haven’t yet had much/any media scrutiny.    In the title of this post, I characterised them as the Second XI.  That is a deliberate and careful phrasing.  A big school might, say, have six or even ten cricket teams, some comprised of people with no talent but a bit of enthusiasm and a desire for some exercise with their mates on a Saturday afternoon.   But on my reading this is a Second XI; people who aren’t bad, or grossly unqualified for the role, and yet who  –  individually and collectively – don’t represent a committee of the sort of stature for which we might have hoped.  That is true of both of the internal and external members.  Lee Germon captained the New Zealand Cricket team for a while, but was widely regarded as not quite up to it, not really justifying his own selection.  The new MPC, at least taken as a whole, seems a bit like that.  Other advanced countries mostly seem to do better.

I’m not someone who thinks the MPC should necessarily be dominated by economists (although the expert advice to the committee should be), but when the Governor was talking of not wanting economists at all as external members I thought he had gone too far.  Clearly others agreed, and as it happens all seven members were economists by training and education.

But of the internals, none stands out on that score. It isn’t helped by the fact that the Bank is currently without a Chief Economist, and one of the internal appointees –  Yuong Ha –  has been appointed as not much more than a placeholder (a one year term) until they manage to fill the position (it isn’t a great look that in an organisation like the Bank, where economics skills have historically been central, there wasn’t a natural successor to the former (demoted and then resigned) Chief Economist).  Perhaps in time the fulltime successor will add some real intellectual stature and gravitas to the MPC.  In the meantime, the Minister should have rejected a one-year appointment of a mid-level internal appointee: independence is partly about security of tenure, and any mid-career person appointed for one year only is going to have the boss’s views and interests in mind.

Of the other internals, for my money to Deputy Governor Geoff Bascand is probably, at this stage, the best of them.   I have plenty of disagreements with Geoff, and I wonder if there is any track record of him disagreeing robustly with his boss (whether Wheeler or Orr) on policy.  He was also one of the internal champions of the OCR tightening cycle in 2014, but he does have a track record of thoughtful speeches on some macroeconomic topics (if not really monetary policy itself).  Arguably, he is better equipped for the MPC than for his day job (Head of Financial Stability).

As for the Governor, the fact that he went for a year as sole decisionmaker on monetary policy and didn’t see fit to give us even a single on-the-record speech on monetary policy, the cylical state of the economy etc, should be telling.  His interests seem to lie elsewhere.  That might matter less if the other management appointees were real stars (after all, the Governor has a wide range of responsibilities) but they aren’t.

What of the externals?  Three economists have been appointed: Caroline Saunders, Bob Buckle, and Peter Harris.  Again, it is surprising that no media outlet (I’ve seen) has done interviews with or profiles of them.

Both Buckle and Harris are older –  Buckle is retired (and Professor Emeritus) from Victoria University, and Harris while billed as an “economic consultant” must be at least in his late 60s.   That was partly inevitable as a result of the decision to make the MPC jobs substantial (50 working days a year was the expectation), but not large enough to be even half-time, let alone fulltime.  Actual or potential conflicts or interest would rule many others who might have been interested or suitable.

The third appointee, Caroline Saunders, is also an academic (with a couple of other ministerial appointments) –  and the only one of the seven MPC members I’ve never met.  Quite how one squeezes in a 50 day part-time role with a fulltime job at Lincoln is an interesting question, but that is her problem and that of her employers.  Although she is an economist, her interests and experience don’t appear to encompass monetary policy or macroeconomics at all (her publications are here).  But I thought it might be telling that her most recent publication was as a co-author (with a couple of colleagues) of a new book on “wellbeing economics”.  As it happens, after I made some negative comments here recently about the government’s focus on wellbeing – suggesting it was a distraction from dealing with the productivity issues –  a PR firm working with the authors sent me a copy of the book. I haven’t yet read it, but as I’ve dipped in one is left with impression that Prof Saunders may be more useful to the Governor (and government?) in championing his interest in all sorts of (loosely) left-wing issues, rather than in advancing the cause of good monetary policy decisionmaking and communication.

One of the skills asked for in the advertisement last year for external MPC members was “exceptional communication skills”.    Time will tell, but my impression would be that neither Buckle nor Harris (of whom Google shows up very little in the last 15 years) would qualify on that score.  Perhaps the Board changed its mind about the skill sets?

One area where I do have some concern is around the role of the Minister of Finance in these appointments.  In principle, I think the Minister should be relatively free to appoint his or her own preferred candidates, and should be fully accountable for those choices (including through the sort of non-binding “confirmation hearings” –  of the sort UK MPC members face – that I’ve proposed for New Zealand).  As it is, on paper the Minister has no say at all (can reject Board nominees, but nothing more).

But then I’m a bit troubled by the way in which the Board –  all but one appointed by the previous government – ended up delivering to the Minister for his rubber stamp a person who was formally a political adviser in Michael Cullen’s office when Cullen was Minister of Finance (Peter Harris) and another who appears to be right on with the government’s “wellbeing” programme.     They look a lot like the sort of people that a left-wing Minister of Finance –  one close to Michael Cullen –  might have ended up appointing directly.     I don’t think Peter Harris is grossly unqualifed for the role, but I am uneasy that one of the very first external appointees is a former political adviser to a former Minister of Finance of the same party as the one making the appointment.   Note too that the only appointee Labour has so far made to the Reserve Bank’s Board was another former political adviser in the office of a former senior Labour minister.    He too (Chris Eichbaum) is not manifestly unqualified for the role, but I’m not sure it is entirely a good look first up. (I don’t think former political advisers should be perpetually disqualified, but it might be more confidence-enhancing had they been appointed by the other party from the one for which they used to work –  thus Paul Dyer, former adviser in Bill English’s office, would probably be better qualified for the MPC roles than any of the recent external appointees.)

I’m left wondering what sort of behind-the-scenes dealings went on to secure these appointments.  I hope the answer is none.  I’d have no particular problem if, while the applications were open, the Minister had encouraged friends or allies to consider applying. I’d be much less comfortable if he had involvement beyond that, prior to actually receiving recommendations from the Board.  It isn’t that I disapprove of politicians making appointments, but by law these particular appointment are not ones the Minister is supposed to be able to influence.    So any backroom dealing is something it is then hard to hold him to account for.    Perhaps nothing went on, but I have lodged a series of Official Information Act requests with the Minister, Treasury, and the Board of the Bank about any contacts (written or oral) between them on this issue.

In the meantime, given the role these appointees are supposed, by law, to be playing, it might be appropriate for the media to start asking them some hard questions, including around preparedness for the next serious recession, given the very real limits on how much further the Reserve Bank could cut the OCR.

(On a related matter, I saw a suggestion this morning that personnel changes at the Reserve Bank explain the Bank’s now more-dovish stance, notably the departure of longserving former chief economist John McDermott who, as this story put it, was responsible for the forecasts etc that led to bad policy calls in 2014.  But, for all their faults, the Reserve Bank’s inflation forecasts at that time were typically lower than the published forecasts of New Zealand economic forecasters, and those forecasts were embraced enthusiastically by senior management.   Among those deliberating on monetary policy at the time, Geoff Bascand – now a member of the statutory committee -seemed quite as hawkish as anyone.    There weren’t many local dissenters at all at the time –  of those with views in the public domain, this was the only one I found.  And, perhaps entirely coincidentally, the small handful of internal sceptics were dumped off the key advisory committee just as a rate-hiking cycle got underway in 2014.)

 

Updating the Governor’s OCR view

In the wake of the Reserve Bank’s Monetary Policy Statement in February I wrote

As for the overall tone of the monetary policy conclusions to the statement, count me sceptical.  …for the Governor to suggest that the risks now are really even balanced, even at some relatively near-term horizon, seems to suggest he is falling into the same trap that beguiled the Bank for much of the last decade; the belief that somewhere, just around the corner, inflation pressures are finally going to build sufficiently that they will need to raise the OCR. We’ve come through a cyclical recovery, the reconstruction after a series of highly-destructive earthquakes, strong terms of trade, and a huge unexpected population surge, and none of it has been enough to really support higher interest rates. The OCR now is lower than it was at the end of the last recession, and still core inflation struggles to get anywhere 2 per cent. There is no lift in imported inflation, no significant new surges in domestic demand in view, and as the Bank notes business investment is pretty subdued. Instead actual GDP growth has been easing, population growth is easing, employment growth is easing, confidence is pretty subdued, the heat in the housing market (for now at least) is easing. Oh, and several of the major components of the world economy – China and the euro-area – are weakening, and the Australian economy (important to New Zealand through a host of channels) also appears to be easing, centred in one of the most cyclically-variable parts of the economy, construction. …

From a starting point with inflation still below target midpoint after all these years, it would seem much more reasonable to suppose that if there is an OCR adjustment in the next year or so, it is (much) more likely to be a cut than an increase.

The Governor appears now to have come round to that view.   If his re-think is overdue, it is welcome nonetheless.

I don’t take issue with much about his statement. but two lines did catch my eye.  The first was this one (emphasis added)

This weaker [global] outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.

Perhaps that is correct –  although in the data the effect looks small –  but it is quite a dangerous line to walk down.  Either an easier stance of policy was warranted here on the New Zealand fundamemtals (including our exposure to the world economy) or it wasn’t (it was).   The exchange rate should be largely irrelevant to that choice, and reintroducing it like this risks some sort of MCI mentality taking hold.  He’ll remember those bad old days.

And the second, of course, was this claim

As capacity pressures build, consumer price inflation is expected to rise to around the mid-point of our target range at 2 percent.

To which one can really only say two things, a) yeah right, and b) isn’t this the same story the Bank has been telling for almost the entire decade?  Of course, as the former chief economist used to point out, in one sense they had to believe it –  if it wasn’t something they could say hand on heart then they should have adjusted policy already.  But if they really believe capacity pressures are going to intensify from here, they must now be in a pretty small minority.

Even though the data suggest that the Bank should have an easing bias in place (and perhaps should already have had a lower OCR in place), I was a little surprised that having walked past the opportunity in February, the Governor chose to act now.  After all, this is the last OCR decision that he will take as the Bank’s sole decisionmaker on monetary policy.  On Monday, the new statutory Monetary Policy Committee will take over responsibility.  Even though I’ve been consistently running the line that the Governor will, in effect, control all the appointments to the MPC and will effectively control the overall votes, I’d assumed he’d want to observe the proprieties and at least pretend that the new voters might make a difference –  might see things differently from him.

On paper, the Governor’s statement that

the more likely direction of our next OCR move is down.

doesn’t mean much. I’m sure he made this decision with two of the likely new MPC members (Deputy Governor Bascand and the very new Assistant Governor Hawkesby), but the new MPC will have four other members, most probably the new (as yet unannounced) chief economist, and three externals.  Most likely the externals (in particular) won’t want to rock the boat –  they’ll have been selected partly for that quality – but they might quite reasonably see the data differently than the Governor.  That could get a little awkward.   Perhaps the Governor ran risks whichever tack he took, but he could easily have explicitly noted the regime change and could then have eschewed any sort of bias statement (leaving the rest of the statement pretty much as it was).

(Presumably the Minister of Finance will finally announce the MPC members today or Friday.  When he does, I would be delighted to revise my view that they’ll have been selected for their inoffensiveness, if such a revision is warranted.  But I’m not holding my breath.)

And what of inflation?   As readers will know I have been tantalised by the implied inflation expectations derived from the indexed and nominal government bond markets.  Here is the latest update of that chart, the last observation being yesterday’s.

breakevens mar 19

Implied inflation expectations (for the average over the next 10 years) –  implied by people with money at stake, or the opportunity to stake it to clear out anomalies – have been nowhere near target for almost five years now.  In the last few months they have been dropping away again and now are barely 1 per cent.   The Reserve Bank never references this series, but they really should, even if only to make the case for why they think there is no meaningful information in it.

Perhaps you are thinking this is just a global phenomenon.  After all, nominal bond yields have been falling pretty much everywhere.  But here are the 10 year inflation breakevens for the US

us breakevens mar 19

Not only have the breakevens rebounded (risen) in recent weeks, but they remain near the Fed’s target inflation rate (also 2 per cent).

With core inflation still below target after all these years, market-based expectations measures low and weakening, with increasing unease about the world economy (including the economies of our two largest trading partners), with most of forces that impelled the (productivity-less) growth in recent years having exhausted themselves, and with weak business survey measures, the case for a lower OCR already looks pretty strong.

What, realistically, would be the worst that could happen if the Bank had cut and the cut turned out to be unnecessary?  Unemployment would be a bit lower, even if temporarily, and core inflation might rise to the height of, say,  2,2 or even 2.4 per cent.  Perhaps not desirable outcomes in their own right –  the focus is supposed to be 2 per cent — but after all these years undershooting the target hardly likely to destabilise public or market confidence in the Bank’s conduct of monetary policy and delivery of medium-term price stability.

UPDATE:  The Minister of Finance has announced the appointments to the MPC this morning.  My initial reaction is that there is no need to revise my judgement about the structure and likely dynamics of the MPC.  It is quite disconcerting that one (internal) member has been appointed for only a one year term, which will place that person even more than usually under the heavy influence of the Governor.  The Minister would have been better to have started the committee with 3 internals and 2 externals and made the final external appointment when the new permanent Chief Economist is finally appointed.