MPC

Inflation, monetary policy, and central bank spin

Michael Reddell Fiscal policy, inflation, MPC

The CPI data out yesterday were not good news.

Annual headline inflation was, more or less as expected, down, but at around 6 per cent is miles from the 2 per cent target midpoint the Reserve Bank’s MPC has been required to focus on delivering. Much more importantly, core inflation measures show little or no sign of any reduction.

Six months ago I had been intrigued by this chart

It looked as though a reasonable case could then be made that core inflation had peaked a year earlier and was now falling (albeit still far too high).

But jump forward to today and the chart now looks like this

If it still suggests a peak at the start of last year (at least on one of the measures), it is no longer a picture of (core) inflation falling now. (NB: You cannot put much weight on the absolute level of the numbers shown here because for some, unknown, reason SNZ persists in doing the calculations on not seasonally adjusted data, which can materially affect the level of quarterly estimates.)

If you look at a range of exclusion measures (CPI ex this, that or the other), the quarterly picture for Q2 looks a little more promising (but analytical measures such as those above are increasingly used for a reason).

On an annual basis, a whole bunch of measures centre on core inflation of perhaps just over 6 per cent.

Focusing on just two big individual price movements, the CPI ex petrol is up 7.1 per cent for the year, and the CPI ex international airfares is up 5.7 per cent.

The contrast between New Zealand

and Canada (where the central bank has the same target as ours) is striking

Rightly or wrongly, the Canadian central bank last week still judged it appropriate and necessary to raise its policy interest rate.

Over the period since the OCR was introduced, the New Zealand policy rate has typically been a lot higher than Canada’s (for the same inflation target since 2002): the median difference has been 1.5 percentage points. At present, the difference is unusually small even though our inflation numbers look quite a bit worse than Canada’s

If you think Canada is an obscure comparator, the story is, if anything, a bit more stark relative to the US where core inflation measures have also been falling.

And yet having chosen – and it is pure discretionary choice by the MPC – to review the OCR last week, just a few days BEFORE the infrequent New Zealand inflation data was released, the MPC then declared itself “confident” things were on track to get inflation back to target with policy rates at current levels.

Given how wrong they (and most other central banks) have been over the last three years, it is difficult to know how any bunch of monetary policymakers, with any self-knowledge and introspection at all, can declare themselves “confident” of anything about inflation outlooks. But what could possibly have led our lot to such a conclusion a week BEFORE the (quarterly only) inflation data? Once again, it isn’t looking great for them……and I guess it will be fingers crossed at the RB that the quarterly labour market data out early next month are much weaker. But the best official monthly data we have don’t seem that promising.

(As a reminder, it is not too late to apply to become a member of the Monetary Policy Committee although it is unclear that genuinely able people would be that keen to join a body led by underqualified uninterested people and where any genuine insight or challenge is unlikely, on the evidence to date, to be welcomed.)

I’ve always been reluctant to suggest that the MPC, or even Orr, were partisan. Mostly, they just seem not very good, something shown up more starkly in challenging times, and prone to questionable self-serving spin (even in front of Parliament). But since the May MPS I have started to wonder, and the nagging doubt was reinforced last week.

The Minister of Finance brought down the government’s annual Budget on Thursday 18 May. The Reserve Bank’s Monetary Policy Statement was a few days later, on Wednesday 24 May. I was travelling so most of my scattered comments were on Twitter.

On a current affairs show on 20 May, the Minister of Finance claimed that the Budget would not add to pressures on inflation or monetary policy.

This was utterly at odds with the material published by The Treasury. Treasury estimates and publishes a series for the “fiscal impulse”. This measure was designed specifically for the Reserve Bank to give a sense of how, particularly over the forecast period, fiscal policy choices were going to be affecting demand and inflation pressures.

All else equal a falling deficit or rising surplus act as a bit of a drag on inflation, and vice versa for rising deficits or falling surpluses.

This chart was from the Treasury HYEFU published last December and incorporating the government’s then fiscal plans, as formally advised to the Treasury. As you can see, for each of the forecast years, the estimated impulse was negative (the overall accounts were still expected to be in deficit for most of the period, but the projected deficit was shrinking). At the time, most monetary policy interest would have been on the (highlighted) 23/24 year – showing a moderate negative impulse – since it was the period that monetary policy choices would most affect (and anything beyond 23/24 was little more than vapourware anyway, with an election in the middle).

This is how the same chart looked in the May Budget documents (Treasury’s BEFU)

For the key year – the one for which this Budget directly related – the estimated fiscal impulse had shifted from something moderately negative to something reasonably materially positive. The difference is exactly 2.5 percentage points of GDP. That is a big shift in an important influence on the inflation outlook – which in turn should influence the monetary policy outlook – concentrated right in the policy window.

My point is not to debate the merits of the Budget (political parties will differ on that) but to highlight the macro implications of aggregate fiscal choices as estimated by The Treasury, and how utterly at odds with the Treasury’s analysis the Minister’s spin was.

Ministers – and perhaps campaigning ones – will say whatever suits them, whatever relationship (or otherwise) what suits bears to hard analysis and advice.

But one of the key reasons why societies have chosen to delegate the operation of monetary policy to autonomous central bankers is that the central bankers are thought more likely to operate without fear or favour, calling the data and events as they calmly and professionally see it. So, you’d have thought, with a Monetary Policy Statement a few days after the Budget one might have expected some serious detached analysis of the updated Budget fiscal numbers, as they affected demand and inflation. Either citing the Treasury’s estimates or perhaps presenting analysis explaining why the Bank thought the fiscal influence might be different than the Treasury did (the latter using a framework designed specifically for monetary policy purposes). After all, in their previous MPS, MPC minutes had explicitly noted that “members viewed the risks to inflation pressure from fiscal policy as skewed to the upside”.

Central bankers, including particularly at our Reserve Bank, have long avoided taking a stance on government spending and revenue choices. Mostly, they also avoid taking a stance of deficits and surpluses. Those are political choices, and particularly in modestly-indebted countries (like New Zealand) it doesn’t greatly matter to monetary policy whether the budget is in deficit or surplus. It matters way less whether one has a high spending and high taxing government or a low spending or low taxing government, and so it is rare – and appropriately so – for the Reserve Bank to be commenting on either spending or revenue choices. What matters (about fiscal policy) in updating the inflation outlook is changes in the discretionary component of the fiscal deficit/surplus (basically, what the fiscal impulse is trying to capture). This snippet (from a Bollard-years MPS) captures the general approach.

But how did the MPC treat things in the May 2023 MPS, coming just a few days after that very big increase in the expected fiscal impulse for the immediately approaching year, at a time when inflation (core and headline) was way outside the target range and the OCR had had to be raised aggressively?

The only uses of the terms “fiscal” or “fiscal policy” (“fiscal impulse” doesn’t appear at all) are in this paragraph from the minutes. Even here – even that final sentence – it is consistent minimisation.

But these are the only references. In the one page policy statement, there is no link drawn from fiscal choices to the inflation outlook, and only this rather odd (for a central bank) detached observation: “Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP.” So what, one was left wondering…..unless the Governor and his colleagues had taken to playing politics, perhaps to help out a Minister and his colleagues who seem more disposed to the Governor’s way of doing/saying things than, say, the Opposition parties (who openly opposed his reappointment) might be.

Perhaps it wouldn’t even be worth highlighting if this were the only such reference. But it isn’t, by any means. Recall, there are no references in the body of the document to fiscal policy, fiscal impulses, fiscal deficits, OBEGAL, or changes in any of these. But there is a whole section devoted specifically to government spending, on top of the couple of references I’ve already quoted. And the focus there is not on the horizon relevant to May’s monetary policy choices, or the inflation outlook over the next 12-18 months but over the “medium term”, when who knows which government will be in charge and what their spending preferences and priorities will be.

It is quite right that their projections – which simply use Treasury numbers as a base – have real government consumption and investment spending (the bits they publish numbers for) flat for the next several years.

That might raise some interesting issues, including for supporters of the current government who favour lots of government spending (is it really consistent with your values that per capita spending is going to fall quite sharply?, would it prove politically sustainable? and so on).

But it is of almost no relevance to monetary policy. And omits really major bits of the fiscal story (on the spending side, all of transfers and finance costs, and all of the revenue side). Central banks should be mostly interested in shocks to the deficit/surplus outlook. But not, this year, it appears the RBNZ.

The Bank and the MPC seemed to minimise any story about the fiscal contribution to the outlook for inflation and monetary policy (you know, things like inflation still being outside the target range, even with a high OCR, for protracted periods. Those fiscal impulse charts/numbers don’t get a mention. But neither do simple stats like the fact that in December’s HYEFU, on then government plans, Treasury thought the OBEGAL deficit for 2023/24 would be 0.1% of GDP. By May’s Budget, government plans meant a forecast deficit that year of 1.8% of GDP. These are really big changes, playing down to near-invisibility by our supposedly non-partisan independent MPC.

It was all brought back to the front of mind last week when, out of the blue, this observation appeared in the OCR statement

Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP. 

If you relied on Reserve Bank commentary, you’d just never know that, in the period current monetary policy choices are directly affecting, discretionary fiscal policy choices (overall balance and all that) had added, quite considerably, to inflation pressures in this year’s Budget. It doesn’t take much to guess which line the Minister of Finance will have preferred – and it isn’t the one that actually aligns with the Bank’s own responsibilities.

I am really reluctant to believe that partisan positioning is at work, even if (if it is happening) “just” for institutional self-protection reasons. But I find it difficult to see a compelling alternative explanation for the MPC’s approach to fiscal analysis and fiscal impulses in the last couple of months.

Perhaps the Opposition parties will view the Reserve Bank more charitably. But on what has been put before us, there is no reason for them to do so.

An external MPC member speaks

Michael Reddell Central banks, MPC

This blog has been a bit quiet in recent weeks (if anyone has insights on what sections 15D and 98 of the Government Superannuation Fund Act do and don’t allow I’ll be happy to hear from you) but I hope to make up for it this week.

In the 4+ years the statutory Monetary Policy Committee has been in existence, there has been not a single public speech given by any of the three external members. There have been no serious interviews either, just one petulant and testy set of responses to some emailed questions late last year, responses that I characterised at the time this way:

At times, Harris displays all the grace and constructive open and engagement we might expect in a rebellious 15 year old told they have to make conversation with Grandma at the family Christmas celebrations. If the answers aren’t quite monosyllabic grunts. most of them might as well be.

There have never been any rules against external MPC members speaking, just some mix of the Governor’s wishes and their own predilections (shy, lacking confidence in their own views, reluctant to face scrutiny, or simply not believing in either openness or accountability?) that meant it never happened. It really was quite astonishing: not only was it a new regime, which one might have thought participants might have wanted to show off at the best it could be, but we then went into a period of turmoil and fairly extreme policy experimentation, quickly followed by……the biggest monetary policy failure in decades (that high and persistent core inflation), as well as $10 billion of financial losses, for which the taxpayer (you and me) were on the hook. Surely any decent person, charged with all the power and responsibility they personally took the taxpayer’s dime to assume, would want to explain their thinking, their mistakes, and the lessons they’d individually learned.

But not Harris, Buckle, and Saunders, all three now limping towards the end of ill-starred terms in office (each having been reappointed once, they can’t be appointed again – Harris and Saunders will be gone by this time next year, and Buckle by early the following year). And we know nothing at about their views, their contributions, their defences, the lessons they’ve learned, or even any contrition they might feel. Of that latter, presumably none or surely they’d have told us. Decent journalists are only an email or phone call away. Meanwhile, we live with the inflation, the looming recession…..oh, and as taxpayers are $10 billion poorer as a result of their choices.

You’ll remember that the external members were selected in a process whereby (in the words of a Treasury paper to the Minister of Finance)

Which did tend to select against people who might either think hard or make serious and self-critical attempts to learn from their mistakes.

You may also remember a strange article a few weeks ago in which the Minister of Finance and The Treasury (but not the Bank or the Bank’s Board) tried to pretend that there had never been any such restriction. A couple of us are still waiting for responses to OIA to better make sense of quite what game Treasury and the Minister were playing there, but my post a few weeks back makes clear – from their own contemporaneous words at several points through the process- that there had in fact been such a restriction. It appears to have been removed for the next round of MPC appointments (vacancies being advertised at present), and if so that is a welcome step forward.

And somehow, one of the external members, (emeritus professor) Bob Buckle, emerged from his monetary policy purdah to deliver a keynote lecture at the recent conference of the New Zealand Association of Economists (invited, he tells us, by the council of the NZAE no less). His topic? “Monetary policy and the benefits and limits of central bank independence”.

There is 25 pages of text and more than 150 references at the end. But here’s the thing. I’m pretty sure I learned nothing from the lecture and wasn’t prompted to think harder or differently about anything.

In a way, perhaps that isn’t surprising. Buckle’s focus has tended to be on empirical macro (VAR models and all that) and some public finance and tax issues. He doesn’t have a publication record in areas around central bank independence, and has not (that I’m aware of) offered any speeches, presentation, papers or anything with interesting or challenging angles on the issue over the course of his academic career. He is, in many respects, a pleasant establishment figure (and there is a place for them) not one who will make you think about things freshly or differently.

Perhaps the council of the Association of Economists was thinking, “well, after four turbulent years as a foundation member of a Monetary Policy Committee perhaps he will offering some perspectives informed by his experience as a policymaker. After all, he done no speeches, but this will be a more academic audience, which might be in his comfort zone. And, after all, a lot hasn’t gone well for monetary policy in the last few years”. If so, they must have been disappointed.

Someone who was there sent me a message later that day

I’m no expert so cannot speak about the literature he described, but the lack of NZ content was so noticeable it was weird. Cliches about “elephant in the room” and all that. He did mention “we need to wait for full assessment” when someone asked a question about the covid monetary interventions, but he was obviously uncomfortable saying even that.

It seemed impossible to distinguish from a paper he might have written had he never been appointed to the MPC. Was there nothing he thought differently about, or understand more (or less) from having been inside the tent? If so, he clearly wasn’t inclined to tell us. And, in fact, as my correspondent pointed out there was hardly anything about New Zealand at all (I checked and there are no mentions of “New Zealand” outside footnotes and references that are more recent than about 1990).

It can’t have been just that he didn’t want to offer any thoughts relevant to the immediate monetary policy situation (where will the OCR peak and when and why?). It must instead have been that he had nothing insightful or challenging to say on his own topic (just possibly, the Governor had persuaded him to deliver something so grey and un-insightful, but (a) that would hardly be in the Governor’s interest (he is usually keen to talk up his committee), and (b) real insight shines through anyway. There was none in Buckle’s paper.

There might, for example, have been thoughts on accountability. The literature is replete with references to the importance of accountability if a central bank is to have operational autonomy. But how does Buckle think about that specifically, having been one of those who were to be (in principle) held to account, in tough times. What sort of accountability does he think really matters and why? What, if anything, made a difference to his own conduct/advice. He offers us nothing.

Or, say, on communications. What is it that convinced Buckle, now as a policymaker, that never hearing from (ostensibly) powerful key policymakers (and it isn’t just no speeches or no interviews but no select committee appearances) is the best way to run an operationally independent central bank? Again, no insight.

And if operational independence for central banks tends to reduce inflation (there is some suggestion in the literature that it may), is that always and everywhere a good thing. After all, in the aftermath of 2008/09, a whole bunch of countries went through a protracted period of inflation undershooting the target. Perhaps an inflation-happy Minister of Finance might then have been better than an independent central bank? Perhaps not, but the issue isn’t addressed (not even, more extremely, in the Japanese context). And on the other side, there is no serious engagement – even slightly speculative – on what the experiences of the last few years tell us about the case for central bank independence? The implied promise 30 years ago was that if we handed over day to day control to central bankers, we wouldn’t see core inflation of 5-7 per cent again. And yet we did. Buckle never engages much with Tucker’s criteria for delegation to expert agencies (either for central banks, or by comparison with other government activities), but it isn’t controversial that the case for delegation is stronger, all else equal, when the delegatee knows what it is doing.

There is nothing at all about whether, and if not why not, it might be important to buttressing central bank monetary policy operational independence to do something about fixing the effective lower bound on nominal interest rates.

There isn’t even any sense of an intuitive familiarity with the experiences of other countries. What, if anything, do we learn from the cases of the (very small handful) of advanced countries that hadn’t given independence to their central banks (low inflation Singapore being a prime example). These aren’t just issues for New Zealand, but he is a (retired) New Zealand academic and a New Zealand policymaker.

And so on.

There were various small things I took exception to. There were hints of Orr (misleading Parliament) in a couple of attempts to shed some of the blame for inflation onto the Russians, as if core inflation had not already reached its peak (and unemployment its trough) before that invasion

There was the somewhat surprising claim

That footnote 50 took you, among other places for other countries, to the Reserve Bank’s report marking its own homework late last year. Sure enough, when you check it the word “mistake” doesn’t appear at all (or “error”) and there is no expression of “regret” at all (you’ll recall Orr’s standard line is the non-regret regret “I regret that NZ has had to deal with a pandemic, the war etc”).

And if this paper might not have been the place to go into all that in detail, wasn’t it an obvious place to think aloud about the place for contrition (people being human, mistakes being inevitably, and some of those mistakes are very costly indeed to people who are not themselves policymakers, while often appearing to have no consequences at all for those who made the mistake) in the independence/accountability context.

One interesting line that popped up in several places during the speech was a concern about anything that might tie the hands of the MPC.

This paper suggests there are intersections between legislated objectives and operational independence that could have implications for central bank independence and the political acceptability of CBI. These intersections involve expanding central bank mandates, conditions attached to the pursuit of primary objectives of monetary policy, and funding arrangements that could influence central bank independence over the choice and scope of alternative monetary policy instruments.

That is fairly wordy, but what it means is that Buckle thinks they need to be free to lose $10 billion again on fresh highly risky financial interventions (having neither here nor in the 2022 self-review either expressed contrition for the actual losses, shown how they would do better in future, or explored whether there might be reasonable limits to the financial losses taxpayers might be willing to let unelected officials incur (almost all government spending has to be appropriated by Parliament first, but not when the MPC takes the public balance sheet for a spin)).

Which brings me nicely to the last substantive section of Buckle’s paper, on fiscal policy connections. It is fairly unenlightening (and reminded me of the ambitious play by the Secretary to the Treasury for a greater role for fiscal policy just before everything went to pot on inflation). But Buckle repeats, unreflectively, suggestions that central bank independence might have led to lower fiscal deficits (and seems to think this is automatically a good thing). He then suggests that times are changing and fiscal policy might be more of a threat, illustrated with this chart

Perhaps, but here is another way of looking at things. Here is net government debt for half a dozen small to middling inflation targeters with independent central banks, including New Zealand

All these countries have pretty moderate levels of net debt, and all except Australia (barely) have had a falling ratio of net government liabilities to GDP over the last 30 years.

On the other hand, here are some other (larger) countries with independent central banks (in the euro area by far the most independent of any of the central banks)

All four lines slope upwards, and in all four cases debt is a lot higher than it was in 1995, early in the new era of central bank independence.

Perhaps it is fair to suggest there may be some future issues in some of these countries for central banks, but you’d have thought that a New Zealand policymaker might recognise the very wide range of country experiences (which might also make one a little sceptical that whether or not the central bank is independent explains much if anything of advanced country fiscal choices and outcomes).

No doubt there will have been some readers who got something from something like the Buckle lecture (I passed it on to my economics student son eg, and there is always a use for introductory material), but from a serving policy maker, to a premier New Zealand economics audience, it really is pretty disappointing.

Buckle is probably the least unqualified of the external MPC members, but efforts like this are a reminder of how far from the frontier of best practice New Zealand’s new MPC – creature of Orr, Quigley, and Robertson – is. One can only hope that if there is a new government that they will care enough to insist on much better (in the RB, and in so many of New Zealand’s degraded public sector institutions)>

The $10bn amendment

Michael Reddell LSAP, Monetary Policy Remit, MPC

Late yesterday afternoon the Minister of Finance issued a new Remit to the Reserve Bank Monetary Policy Committee (his statement is here, the new Remit itself is here). The Minister’s statement tends to minimise the entire thing (and nothing really about the inflation target changes), but – no doubt consciously and deliberately – gives not a mention to the most material addition to the Remit.

The lead-in to the more-specific targets section of the Remit is now as follows:

This was the backdrop to the additional words I’ve highlighted

$10 billion of so of losses of taxpayers’ money as a result of Reserve Bank MPC choices around the LSAP programme, choices that had the imprimatur of the Minister of Finance (and apparently no objection from the Treasury). As the bonds are being sold back to The Treasury, the realised component of the losses is mounting significantly each month ($317m in indemnity payments were made to the Bank last month), but total estimated losses hang fairly steadily around $10 billion.

The addition to the Remit is welcome. Formally, it doesn’t bind the MPC to anything much (note that “where appropriate” at the start of the second sentence, which appears to conditions things in the third sentence too) but will add put pressure to a) do some advance analysis and b) disclose their thinking and analysis when next the MPC is tempted to throw caution to the wind and take huge risky punts in the financial markets (conventional monetary policy, by contrast, poses very little financial risk to the taxpayer). In 2020 there is no sign they ever did the risk analysis, they certainly never shared anything substantive with the public, they just took the plunge, and over the following months got the Minister to agree to up their gambling limit, still with no serious risk analysis, and no disclosure.

But think what it cost the taxpayer – you and me – to get here: it really is the $10 billion amendment.

MPC members have never made a serious attempt to defend either the alarmingly poor process or the wildy costly financial outcomes. The Governor has waved his hands and blustered about the (wider economic) gains being “multiples” of the losses, but has produced no serious analysis to support such claims (and in the unlikely event there was such a boost to aggregate demand, that would mean the LSAP programme had directly contributed to the high inflation looming recession mess we are in now), while the external MPC members have never said anything about anything they’ve been responsible for. And yet, having simply thrown away $10bn, on no good process or analysis, each of Orr and the three externals have been reappointed by…….Robertson, the man who signed off on the indemnity, not having himself demanded serious supporting analysis from the MPC or The Treasury.

There was an article in the Herald the other day about the Auditor-General having reviewed aspects of that great Labour/New Zealand First boondoggle, the Provincial Growth Fund. This was the headline

The LSAP involved multiples of the amounts involved in the PGF, clear and documented losses, and no serious attempt to show whether there were any benefits at all. $10 billion is a lot of money. It would seem an obvious case for the Auditor-General to look into, given that none of those we should rely on as first line of defence (RB Board, Treasury, Minister of Finance, FEC) seem at all interested. Much easier to file it under experience, avoid even any serious expression of contrition (whether for these losses or the inflation debacle), reappoint all those involved, and just throw out bone with a slight (if welcome) amendment to the Remit.

Mendacity

Michael Reddell MPC, Treasury

On Monday the Reserve Bank Board put out a release indicating that it was opening applications to fill two external MPC vacancies (which will arise next year when the second and final terms of Peter Harris and Caroline Saunders expire). By law, the Minister of Finance can appoint to the MPC only people the Board has recommended (the Minister can reject nominees, but cannot simply impose his/her own people). There are all sorts of problems with this process and with the people involved in it, but that is for another day and another post.

When I opened Monday’s emailed release, my eye lit immediately on this

This appeared to be quite a change from the stance adopted by the Board (which includes the Governor) and the Minister of Finance since the MPC was set up under which (to quote from a January 2019 Treasury report to the Minister released to me by the Minister of Finance (page 14) in June 2019 in a response to an OIA request which had asked, inter alia, about policies designed to exclude persons or types of persons)

Anyway, it seemed like good news. I exchanged notes with a few people idly speculating on what might have changed their mind. Perhaps they (Bank, Minister) had just got sick of being mocked for being the only central bank in the world where expertise was an active disqualifying factor? Perhaps The Treasury, with a newly-strengthened oversight role in respect of the Bank, had played a part? Perhaps the new Board, deeply underqualified bunch of government mates as it was, had as fresh faces thought the old ban looked odd. Perhaps Orr and Quigley were conscious that the government might well change later in the year and that the Opposition parties already seem to look askance at various of their choices, structures, and individuals? Getting rid of the absurd ban might neutralise one more obvious irritation. We don’t know (although I have lodged an OIA request, which might – months down the track – shed a little light). It is fair to note that the very next sentence in that extract above read as follows

On Twitter, the Herald’s Jenée Tibshraeny mentioned that she was approaching Grant Robertson’s office to ask about the apparent change of stance.

Late yesterday, her story appeared. The key bits relevant to this post were a direct quote from the Minister

and a direct quote from The Treasury

(to be clear, the Bank’s sticky fingers do not appear in this story at all).

There are all manner of problems with these lines given – by powerful people and institutions – to the journalist.

For a start, why did news of the blackball emerge at all? Well, that was because an academic – who could have been well-suited to the MPC role – got in touch with me in late 2018 or early 2019 and told me that he had reached out (possibly to the Board chair himself, but I can’t now be sure of that) and been explicitly told that there was no point in applying because the Board would not be considering anyone who was an active, or likely future, researcher on macro or monetary policy matters. Since the person concerned (understandably) did not want me directly quoting him, I lodged OIA requests with the Board and the Minister of Finance to see what I could smoke out (responses written up in a post here). The Minister’s response, linked to above, revealed the policy which had apparently been agreed between the Minister and the Board. The description tallied more or less exactly with what the academic had independently told me.

The revelation of that policy agreement didn’t just die in a blog post here. Jenée Tibshraeny, then at interest.co.nz, picked it up, talked to various central bank watchers etc and wrote a story. She even talked to the Minister of Finance and to the Bank.

Her story is here. My post following it is here. Here were the lines from the Minister and the Bank

There is not the slightest suggestion there that Treasury had used ‘over-zealous language” or that the critics had got the wrong end of the stick. Rather, they are defending their stance. In fairness, you would have to say that the Minister seemed fairly half-hearted (and I have heard suggestions over the years that Quigley, the Board chair, had been the driving force behind the blackball, and that Robertson had just gone along), but he doesn’t disavow the policy or Treasury’s description of the policy.

And there, the odd jeer aside, the matter rested for a while. The new MPC was what it was, there were going to be no external vacancies for a while, and of course there was Covid.

But by late 2021 I was focused on the fact that the end of the first terms for two MPC members was approaching and started highlighting the question as to whether the blackball on expertise was still in place. Others were talking about it too, including to Tibshraeny. She had the access the rest of us didn’t and asked the Minister or his office about the policy.

As it happens, documents show they were always just planning to reappoint Buckle and Harris, so there was never a fresh search programme (or even a serious evaluation process). So they could have avoided Tibshraeny’s questioning, but instead they seem to have been quite clear (her story is here) with these two extracts

Most central bank commentators and watchers lamented (even former MoF adviser Craig Renney, quoted in the article, seemed less than convinced by the policy) but it all seemed pretty clear. The policy was what it was (recorded by Treasury) and the authors were standing by it. Had there even been any lack of clarity or misunderstanding, either the Bank or the Minister could have had their comms people make that clear. But of course, there was no misunderstanding, just a pretty clear (bad) policy.

All of which brings us back to those lines, from the Minister himself and from The Treasury, in yesterday’s Herald article. They seem utterly detached from reality, oblivious to the past paper trail. It is hard to avoid concluding that they are, and are intended as, mendacious spin. One might now have low expectations of a member of the current Cabinet, but what explains lines from The Treasury – a government department, not a political agency? I’ve lodged an OIA with Treasury to see if any useful light can be shed.

In the Herald article Robertson is also reported playing distraction with the observation that “the MPC’s three existing external members had done research”. Caroline Saunders publishes a lot of research, but she isn’t (and doesn’t pretend to be) a macroeconomist, so what she does or doesn’t publish is simply irrelevant to the blackball Robertson and the Bank had put in place. I’m not aware Peter Harris has ever published any research, and certainly not in his term on MPC, which isn’t surprising as he has never really been a research economist. Bob Buckle, a former Treasury official and retired VUW academic macroeconomist, has published papers in recent years (and perhaps MoF hoped the journalist would look up his VUW page). Papers on non-macro topics (of which there are several) are no more relevant to the blackball than they are for Saunders. There are two (largely descriptive) papers on macro topics that have been published while Buckle was on the MPC, but both were written before he took up the MPC role (one is a chapter in a book in which I also had a chapter, so I know well the painstakingly slow publication process). All of which made sense: for Buckle, the MPC role was largely a retirement job, and the quid pro quo seems to have been that he got the role and had to agree not to do future macro research, which probably wasn’t an inconvenience for him as he was retiring anyway. And in his MPC role, Buckle has not once given a speech, a paper, even an interview on New Zealand macro or monetary policy matters.

I can understand why Grant Robertson might now be embarrassed about having adopted a restriction (on expertise in central bank decisionmaking) that made him, on that score, worse than Donald Trump.

But what is staggering is Robertson descending to Trumpian standards of utter disregard for truth or the public record. And that The Treasury seems to have been aiding and abetting that descent.

MPC appointments

Michael Reddell Monetary policy, MPC

There have been a few posts here recently about Professor Caroline Saunders, whose initial term on the Reserve Bank MPC expired at the end of March and who was eventually, belatedly, and with no announcement at all, appointed by the Minister of Finance to a short second (and final) term on the MPC. The most recent of those posts was here.

When there was no announcement before the Saunders term expired, I had lodged OIA requests with both the Reserve Bank and the Minister of Finance for material relating to her reappointment (or otherwise). Responses to both emails have now come back.

If it is now clear that the bottom line reason why Saunders was not reappointed before her term was expired was administrative slackness (between the Minister’s office and Treasury mainly), the documents that were released don’t put any of those involved in a particularly good light.

My request to the Bank was fairly broadly phrased

I am writing to request all and any material (including any advice to the Minister) relating to the expiry of the MPC term of Caroline Saunders and any discussions or decisions to reappoint her (or not) or to extend her term

and since the Bank says it has not withheld any documents, it seems fair to assume that what I have is all there is.

This was the first document they released, from the minutes of the Reserve Bank’s 7 December 2022 Board meeting/

In other words, there was no paper analysing the record of the MPC or the personal contribution to the MPC made by Saunders, even though the decision to recommend reappointment was being made in the midst of the worst monetary policy failure in the decades since the Reserve Bank was given operational independence around monetary policy. There was also apparently no paper discussing the best balance of the MPC in the period ahead, or the appropriate length of time for a reappointment (not even, apparently, a discussion as to why the recommendation is for an extension of “up to three years” when the law would allow up to a four year second term. There is also no sign in those minutes of any substantive discussion or hard questions being posed by Board members (unsurprisingly perhaps given the lack of relevant background of all but the chair, who presumably had any conversations with the Governor in private, unminuted).

It was, it should be noted, no better when the other two external MPC members were reappointed (for terms from 1 April 2022), but the inadequacy of the process is all the more glaring by late 2022 when the extent of the monetary policy failure, for which MPC members are responsible, was much clearer than perhaps it was to the previous Board in late 2021.

The Board chair then seems to have moved fairly expeditiously, sending a letter of recommendation to the Minister dated 16 December 2022.

although it is not entirely clear whether this was sent directly (it is signed and dated) or only as an attachment to a memorandum to the minister from Quigley dated 9 January 2023. This is the entire substance of that memo

Note several things

  • (trivially) there is actually a mistake in the letter (Buckle’s second term expires in March 2025 not September 2025
  • there is no advice (not a word) to Minister about the contribution Saunders had made over her (by then) 3.75 years on the MPC, a period in which (a) the regime was new, and (b) monetary policy was sorely tested.
  • despite explicitly noting to the Minister that Saunders could be reappointed for four years, the Board chair offers the Minister no information as to why the Board thinks the extension should be only “up to” three years.
  • presumably after discussions with Treasury, the Minister is told that the process for reappointment should take about two months (this in a document submitted on 9 January).  Elsewhere in the formal recommendations the Minister is asked for a decision by 23 January.

And then there are no other documents (and the Minister has also not indicated that he has withheld whole documents) for more than two months.   The next document is dated 8 March, only three weeks before the Saunders term expires.

In any country with serious scrutiny of the MPC –  and a belief that external MPC members made any difference whatever – serious questions would have been being asked by now, by market participants and by journalists.  After all, on paper MPC members wield a great deal of power, and things hadn’t been going that well with monetary policy.  But there weren’t.

In an internal Reserve Bank email (to the Governor) we learn that on 2 February “the MoF’s office asked for a clarification to be made to the letters/report which we provided (that CS be reappointed ‘up to 3 years’ subject to the preference of the MoF”.

And again nothing until 4 March when the timeline in this same email records that “MoF’s office call Neil Quigley to seek clarification on Caroline Saunders’ reappointment.   On 6 March, the Reserve Bank learns “from MoF’s office that the recommendation will go in the weekend bag….and we should get an outcome early next week”.

And they did

which is strange again, because while the Minister is reported as favouring staggered terms for MPC members (and very sensibly so) he deliberately, and with no officials’ recommendation plumped for a term for Saunders which will mean that the terms of all three external members expire between 31 March 2024 and 31 March 2025. It would have been easy to have given Saunders a three year term or even a four year term and really stretched things out. But he did not, and there is no indication why in any of the papers.

Quigley reverts to the Minister accepting the general idea and a very short extension to 30 June 2024 is agreed. Quigley observes that “Caroline’s term ending at that time is entirely workable from my point of view. As you say, the search for a replacement can still be part of the same search that we undertake to fill the other vacancy from 1 April 2024”. Since it is already May, one might suppose that a new search process – since both Saunders and Harris cannot be reappointed again – will be getting underway fairly shortly.

At this point it is realised that they are too late to get the Saunders reappointment confirmed before her term expires (it needed to go through the Cabinet Appointment and Honours Committee and to be confirmed by the full Cabinet) but nobody seems very bothered by this. As the documents note, and as I initially missed, the (dubious) statutory provisions for MPC appointments allow an MPC to stay in place after their term ends unless advised otherwise by the Minister. But there is no sense of urgency, no sense (perhaps accurately) of any likely media or market interests (despite the on-paper power these positions wield), at least until I wrote a post on 3 April, which prompted the Reserve Bank comms staff to (a) prepare a draft statement if at that late point there were to be any media questions (which there weren’t) and (b) quickly update their website to make clear that members could remain in office after the expiry of their term,

There is no hint in any of the papers released as to why the Minister of Finance chose not to announce formally the reappointment of Saunders (or the extension of Harris, to get around election timing) and rather leave the fact to be discovered either by chance or by assiduous readers of the Gazette.

In the grand scheme of things, perhaps none of this matters a great deal, but the promise was, in reforming the Reserve Bank Act, that MPC members really would matter, and would make a difference. Over four years, there has not been the slightest evidence for it.

But it still seems to be a very bad look, given that the government chose to keep on with the curious appointment model in which the Minister can only appoint people his hand-picked (and not for relevant expertise) Board recommends, that there is no evidence the Board itself engaged in (or received) any serious analysis or review of Saunders’ contribution to the MPC through such a challenging period, and that there is no evidence that any serious substantive advice was being provided to the Minster on her contributions, strengths and weaknesses. It doesn’t reflect much better that there is no sign that the Minister cared, or sought such advice (despite how far outside the target range core inflation has been). The Minister’s office processes seem to have been slack, to say the least. No doubt he is a busy man, but he has a fully staffed office, and there is much justification for sitting doing nothing for two months on a recommendation for an appointment that really should be somewhat market sensitive.

As for Saunders, were she really making a stellar contribution to the MPC (a) the Board might have been expected to have highlighted that and recommended a full four year term extension, and (b) the Minister might have been expected to have enthusiastically agreed (she was after all his preference four years ago). Instead, nothing, and about the shortest credible extension it was possible to have given her.

Finally, there are some issues for any incoming government later this year. As I often point out, a new government that was unhappy with how the Reserve Bank and MPC have been operating cannot simply get rid of the Governor. They can however make appointments around him (including Board and MPC members). Any different government has been given quite a gift by Robertson, in that all the external MPC member positions will expire by 31 March 2025 and all have to be replaced. The Board chair’s own term expires on 30 June 2024 (he was given only a two year (presumably final, transitional) term on the new Board. Given the mediocre appointments to date, and lack of evidence of serious scrutiny and review, if an incoming government really cares about making things better at the Reserve Bank, they will need to take the issue in hand early and make it clear to the Board – themselves quite unqualifed to judge – just what sort of people the Minister will consider appointing (removing, for example, and one would hope, the current blackball on anyone actually engaged now or in future in any serious macroeconomic analysis and research). It is most unlikely that better outcomes (people, process, policy) if Orr and Quigley are simply left to do things as they’ve been done for the last four years.

The question of course is whether the Opposition parties really do care. It is easy to run lines now about “cost of living crises” and high inflation, but (core) inflation is a Reserve Bank outcome and the Minister of Finance is ultimately responsible for, and wields more than a few levers over, the Reserve Bank (people, processes, budgets, and policy goals).

In the meantime, what this little episode reveals again is the empty charade the new MPC is, and always was. We have a minister who was interested in the appearance of change rather than the substance of change, and who has shown no interest at all in holding policymakers to account for signal policy failures. And a Governor who could live with (perhaps even embrace the rhetoric of ) the appearance of change so long as his actual dominance of the process and institution was left substantively unchallenged. A double coincidence of wants, just not one well aligned with the wider public interest.

Reviewing and reforming the RBA

Michael Reddell Australia, Monetary policy, MPC

The incoming Australian Labor government last year established an independent review of the Reserve Bank of Australia’s monetary policy functions, structures and performance. The review panel (chaired by a former Bank of Canada Deputy Governor) reported a few weeks ago and their full report is here. Periodic reviews of this sort aren’t uncommon, and are often triggered by episodes of discontent around the performance of the respective central bank (in New Zealand, the 2001 review conducted by Lars Svensson was an example).

There is no clear-cut single preferred way to organise policy functions that society (as represented by government and parliament) wishes to delegate decision-making responsibility to. That is true whether one thinks globally, or just of the subset of advanced economies that countries like New Zealand and Australia usually use as benchmarks or experiences/structures that might offer insight.

If this proposition is true generally, it is no less true of monetary policy specifically. And that shouldn’t really be surprising, including because monetary policy is really quite a recent thing. In New Zealand and Australia the transition to a market-based financial system and a floating exchange rate is not quite yet 40 years old, and even among larger economies floating exchange rates more generally date back only 50 years or so. Modern monetary policy is a cyclical management function (leaning against cyclical macroeconomic fluctuations subject to a constraint of keeping the inflation rate in check), and yet our data sets are really quite limited (since 1984/85 New Zealand has had 4 or 5 business cycles, and the creation of the euro means there are really only perhaps 15 or so advanced-country monetary policy agencies). We simply do not know with any degree of confidence that one form of monetary policy governance etc structure will produce better results over time than another. Instead we (all, including the RBA review panel) argue from small select samples, from specific historical incidents (where multiple influences are always likely to have been at work), and from the mental models we carry round (some likely to have achieved a professional consensus, others not).

None of which is to suggest that such reviews should not take place. Of course they should, and with good people and a government that is interested in good future structures (as distinct, say, from just being seen to having had the review – there were dimensions of the latter around the review then then New Zealand government commissioned from Lars Svensson) useful insights, outcomes, and reforms can often emerge. There will always be aspects of current practice or legislation than benefit from someone standing back and concluding that it is really time for an update, even if in practice the old arrangements were working tolerably adequately.

But one should also be cautious about expecting too much from any particular review or any particular set of reforms.

The current RBA model is not one anyone would prescribe today if they were setting up a central bank from scratch. A fair bit of the legislation dates back to the founding in 1959, including this

It has been interpreted, stretching language and concepts to a considerable extent, as encompassing the way monetary policy has been run for the last few decades, but really it was written for an age of (among other things) fixed exchange rates. No one would write it that way now.

And the governance? The Reserve Bank of Australia Board makes the monetary policy decisions (back in the day in practice the Treasurer did) and is much as constituted decades ago. The Governor, Deputy Governor, and the Secretary to the Treasury are ex officio members and there are six non-executive directors appointed by the Treasurer. The non-executive members have typically been (often quite prominent) business figures, but over recent decades it has been normal for one of the six to be a professional economist. It is a very unusual model these days for the conduct of monetary policy, although note that the sort of people appointed as non-executive directors is a matter of political choice (successive Treasurers) and I can’t see anything in the legislation that would have prevented six technical experts being appointed.

If the relevant bits of the legislation haven’t changed a lot over the decades, practice has. Monetary policy decisions are clearly made independently by the RBA, in pursuit of a target that is in practice agreed in advance with the Treasurer, they are announced transparently, there are minutes of a sort published, as well as the quarterly Statements on Monetary Policy. Senior managers appears before parliamentary committees and have fairly extensive and serious speech programmes. The RBA is a modern inflation targeting advanced country central bank, but operating on quite old legislative foundations. As an organisation, over the decades it has had considerable strengths, including typically a strong bench of very capable senior managers, and people coming up behind them. Successful organisations in many fields tend to promote mainly from within: that has been the RBA approach (and is very much in contrast, say, to the RBNZ). Note here that promoting from within is not itself a basis for a successful organisation, simply one feature that already successful organisations, continually refreshing themselves, often display.

I was an admirer of the RBA for a long time, and 20+ years ago when the Svensson review was underway (when I was both part of the small secretariat and a senior manager at the RB) thought that New Zealand should look to adopt elements of the structure and culture of the Reserve Bank of Australia. They tended to produce more stable outcomes, produce better research, communicate more effectively, and have a stronger sense of legitimacy than our “Governor as sole decisionmaker” system had achieved (or than Svensson’s preference, of a small internal decision-making committee (of which the position I then held would have been a member) was likely to be able to achieve. The RBA on the other hand saw us as somewhat strange, not always entirely fairly. I recall a time when Glenn Stevens as Assistant Governor and he came over to observe our monetary policy and forecasting week leading up to an MPS (shortly after we had started publishing forward interest rate projections), and he emerged from the week genuinely surprised that our approach was far less mechanical, nay mechanistic, than he had been led to expect. Or a visit from David Gruen, then head of research at the RBA, suggesting that the fact that our interest rates averaged higher than those in Australia suggested we had monetary policy consistently too tight (in fact prior to 2009 New Zealand inflation typically averaged in the top part of the target range).

Over recent decades, Australia has enjoyed a reasonable degree of macroeconomic stability (the review report includes a table showing the standard deviation of real GDP growth less than for any other country shown), this in any economy exposed to very big swings in the terms of trade. As noted above, the samples are small but there is nothing obvious to suggest that overall the Australian approach to monetary policy has delivered worse than other advanced country central banks. But there have been troubling episodes, notably including the one in the years running to Covid when Australian core inflation ran consistently well below target (much more so than anything seen at the time in other countries, including New Zealand where core inflation by then was getting close to the target midpoint). There are also more recent episodes of concern – about specifics of the RBA Covid response and latterly about the sharp rise in core inflation – but through that period it is perhaps hard to differentiate the RBA’s failure (underperformance) from that of a wide range of other advanced country central banks (themselves with a wide range of governance models).

This was one of the things that troubled me about the review report. The first substantive chapter is focused specifically on these recent episodes. It is easy to highlight areas where things could have been done better in (almost any) specific episode – and some of the material cited is pretty disconcerting – but that is almost certainly true of every central bank, and there is no attempt I saw in the report to illustrate that anything would have been very much different with a different governance/committee structure. We might hope it would have been, but the panel offers little reason (and realistically they couldn’t offer more) that it would have been. New Zealand, after all, has introduced a committee, and the panel notes favourably (too favourably) the expertise of its members relative to RBA external board members, but many or most of the same mistakes or weaknesses the panel highlight in Australia over the last three years were also evident in New Zealand – as far as we can tell, as less material has been released here than there, us not having had a recent external review and the Reserve Bank’s own review was largely defensive and unenlightening in nature). Should there have been a proper cost-benefit analysis, and serious questioning from the Board, before the RBA bond-buying programme was launched? No doubt (and the review report is properly critical about the absence, and the likely weak case) but there is no evidence of anything even slightly better in New Zealand. Or, as far as I’m aware, in any or many other advanced countries. Perhaps the RBA case was less excusable, since they started bond buying a lot later, rather than in the heat of the crisis, but the practical difference ends up being slight.

The review panel proposes a new model with these important features

  • monetary policy decisions would in future be made by a Monetary Policy Board (with a separate RBA governance board, and the existing Payment Systems Board),
  • the MPB would have nine members, the Governor, the Deputy Governor, the Secretary to the Treasury, and six expert non-executives appointed for non-renewable terms of five years, extendable for up to one year)
  • non-executive members would be expected to devote about one day a week to the role (around eight monetary policy decisions a year)
  • there would be a press conference for each decision,
  • votes would be disclosed but not attributable (ie a decision might be made 7:2, but the two would not be identified by name)
  • non-executive members would be expected to do at least one public engagement or speech a year,
  • non-executive vacancies would be advertised, but recommendations to the Treasurer (who would make the final appointments) would be by the Governor, the Deputy Governor and a third person (presumably to be chosen –  altho by whom, Treasurer or the officials? –  from time to time).

If you were starting from scratch, one could think of worse systems. But this proposal seems to have a number of weaknesses and reason to suspect that unless a strong political consensus developed early around making things work really differently (rather than differently in appearance) it is far less good a system than could have been devised. Even then, I would not be overly optimistic. More generally, my impression is that the report tends to underweight the relative importance of the Governor and very senior management to how central banks operate.

Starting with the small stuff, as the report notes it is highly unusual for the Secretary to the Treasury to be a full voting member of a central bank monetary policy decision-making body. It was one thing in 1959 – at that time New Zealand also had the Secretary to the Treasury as a full member of the (largely toothless) central bank board – but it is 2023. Other countries – including the UK and New Zealand – have preferred the model of a non-voting Treasury observer, which seems bit suited to (a) the desire to ensure at the highest levels that information flows freely between monetary and fiscal agencies) and (b) the Secretary’s own primary responsibilities and loyalties. The report proposes amending the legislation to make clear that the Secretary is voting his/her own judgement, but if so that tends to defeat the purpose of their place on the Board (being there solely ex officio), and in times of tension – and one should build system for resilience in tough times, not for when everyone is getting on fine and everything is going swimmingly – will likely complicate the Secretary’s own position (including as adviser to the Treasurer in holding MPB members to account for performance).

In general I am in favour of a model in which external members outnumber executives, but 6:3 in a nine person board doesn’t feel right (even if it parallels current numbers). 4:3, with the third executive being the Assistant Governor responsible for economic policy, seems a better size overall, and also more realistic about the ability of the system to continue to generate a steady stream of able people to fill (only) five year non-executive terms. And a 7 person committee is more likely to limit the risk of free-riding by individual non-executives.

It is difficult to see how a “day a week” model is likely to work IF the goal really were one having a powerful role, including as expert counterweight to staff, if non-executives were devoting only one day a week to the role. I am not aware of any precedents for such a small contribution, which seems to sit closer to the current RBA Board model (might such board members devote 2 days a month to the role, one to the meeting, one to the papers?) than to other advanced country MPCs. At the Bank of England MPC, probably still the best model, non-executives are paid for 3 days a week work, and at a rate that (least by academic standards would be a reasonable fulltime income). On a day a week model, not only is the actual amount of time any member can devote to RBA matters limited, but the remuneration would that for any non-retired person it would have to be just one part of the member’s employment/income. Most plausibly, they would be current academics, who might otherwise not spend a vast amount of time keeping track of data or of the literature in the specific fields relevant to central banking. We might assume that people will not be disbarred (as is NZ) for doing ongoing research in relevant fields, but even in Australia the numbers of such people are not limitless. One day a week looks like a recipe for an ongoing dominance of management and staff. Consistent with this, while the report suggests that externals should have direct access to staff, if they do not have dedicated analytical support staff of their own their ability to make a difference and shape what is in front of the MPB is likely to be limited. This is, incidentally, one argument for a quite different system – as in Sweden or the US – in which outsiders become full insiders while they are MPC members.

The appointment process is also a concern. One of the weaknesses of the New Zealand MPC system is that the Governor exercises considerable effective control on who serves on the MPC. A really good Governor would have a strong interest in promoting genuine diversity of view and real ongoing intellectual and policy challenge. Real world bureaucrats, running their own bureau, perhaps less so. No doubt there will be arguments about “fit” etc, but the value of outsiders is often in the extent to which they are willing to bring fresh thinking and not be easily deterred by management flannel and weight of paper. With a strong “third person”, perhaps it would work out okay, especially if a Treasurer was clearly committed to viewpoint diversity, challenge etc, but many potential “third persons” might be inclined just to defer to the perceived expertise of the Governor and Secretary.

Accountability does not appear to be a key element in the RBA reform proposal. That seems unfortunate – perhaps especially coming hard on the heels of the massive financial losses central bankers have run up and the scale of their inflation forecasting and policy mistake. If as a society we delegate great discretionary power to unelected officials – and that is what we do in MPCs – accountability is a key counterbalance, including in maintaining the long-term legitimacy of the model. At very least, MPB members should be required to have their named votes recorded and disclosed. Ideally – but it is probably only an ideal – people should be able to be removed from office for non-performance. In fact, one of the other weaknesses of the proposed single term model for externals is the complete absence of accountability. Their views don’t have to be disclosed, their votes don’t have to be disclosed, and since they can’t be reappointed, there is really no accountability at all. Lack of accountability doesn’t exactly encourage members to devote intense energies to getting things right. Some no doubt will, but it will be all too easy to defer to management and treat membership of the MPB as a prestige appointment (like being on the RBA Board now), this time narrowed down to being for economists, rather than a role in which one will make a difference and expect to be held to account.

As I said earlier, there is no one ideal structure. In the end, one is trying to combine technical expertise, experience, judgement, ability to communicate, and something around accountability to produce good policy outcomes taken in ways consistent with our open and democratic societies and under structures that are resilient to bad times and to bad people All in a field where uncertainty is pervasive.

Many of these requirements might well be met with no outsiders at all. You won’t see it highlighted in the review report but the Bank of Canada is one in which, formally and legally, the Governor himself wields the monetary policy powers (akin in that feature to the RBNZ system pre-2019). But in practice the BoC has built a strong internal culture and an effective system where a Governing Council of senior internal managers makes monetary policy decisions by consensus. I don’t think it is ideal – there is no individual accountability except (presumably) to the Governor – but the BoC has built partially compensating mechanisms with extensive research programmes, self-review programmes, and extensive engagement with academic and other wider communities. Indeed, the Bank of Canada model – which I do not champion – highlights just how important the quality of staff and internal processes are. It isn’t necessarily a problem if decisionmakers typically defer to staff and management expertise – in fact it is what you would expect in a normal corporate board – so long as those decisionmakers can continually assure themselves that staff and management have robust and resilient processes in place, including those that encourage, generate and accommodate, genuine diversity of view and openness to alternative perspectives. In that sort of context, some expert external MPC members can be very helpful (especially if they are familiar with, engaging with, perhaps contributing to) emerging literature, but they aren’t the only type of member who could add value. The willingness to actually ask the idiot question, and never to be content with management bluster, is valuable in any governance context. Thus, in an RBA context, one might wonder whether it is really worth having a whole new Board (especially when the RBA is not a “full service central bank” (doing prudential supervision)), when one could have left the RBA Board responsible for monetary policy but with a requirement say that several members should have directly relevant professional expertise. One could argue that being a board member, responsible for all the RBA functions and governance, might make for a person better able to contribute effectively as a monetary policy decisionmaker (and note that there is plenty of role for outside expert advisers anyway, and the report does suggest a more active macro research programme for Australia generally). And of course, in all our systems Ministers of Finance – rarely very expert at all – make major contentious economic policy decisions in climates of extreme uncertainty, drawing on expert advisers but rarely handing decision-making power to such experts.

Overall, I can’t help feeling that if the Australian government goes ahead and legislates all these changes, none of them (not all taken together) will matter quite as much as who gets appointed as Governor, and the sort of internal culture and people, the Governor (and his/her successors) build. That is a critical choice – in Australia, in New Zealand, probably anywhere – and is likely to far outweigh any potential difference that a few day-a-week academics, cycled through the decisionmaking system on five year terms, might make. A great Governor (and we can’t build systems that assume one) will build and maintain a culture that delivers most of what the review panel (often rightly) seems to be looking for.

This post has gone on long enough. It is about someone else’s country so why my interest? Two reasons I think. First, it is a significant report on a central bank in the midst of troubled times, and there are few of those yet. And second because the choices Australia makes are always likely to be an important backdrop to any future reforms in New Zealand. We have had extensive reforms, clearly designed to look different rather than be different, and any new government needs to look to do over quite a few of the aspects of the New Zealand model.

I was going to engage specifically with the AFR article last Friday by Ian Macfarlane, former RBA Governor, criticising the review (and I thank the two readers who sent me copies). Time and space is limited, so I won’t. It is worth reading, and he makes some fair points (some less so), but it is perhaps worth remembering that Macfarlane was Governor at the peak of the RBA’s past standing. The starting point now is less favourable.

Finally, one of the background papers for the review was commissioned from Professor Prasanna Gai at Auckland University (and ex BOE). Gai currently serves on the FMA board, but probably should be one of those considered for our MPC, but……he would be disqualified by our Governor and Board on the grounds of an ongoing active interest in areas the MPC would actually be responsible for. Anyway, his paper is quite a good read on international models around the governance of monetary policy, and he pulls few punches about the weaknesses of the New Zealand model.

Reappointing and extending MPC members

Michael Reddell MPC

On Monday I wrote about the MPC membership of Caroline Saunders, whose four-year term had expired on 2 April 2023 and who appeared to be continuing to serve only at the day-to-day pleasure of the Minister of Finance. The Reserve Bank’s website on Monday said that her term had expired, and there was no statement from the Reserve Bank or from the Minister of Finance to the effect that she had either been reappointed or told to go away. That all seemed less than desirable (fact, and lack of transparency).

As I noted in that post, it all seemed rather odd. The election is approaching and the Minister of Finance had already last year reappointed one member, Peter Harris, to a term expiring in October. Under the conventions around elections, no new appointment could be made by the current government when the new term would start smack in the middle of the election period. It seemed reasonable to expect that at some point the Minister would use the statutory power to extend Harris’s term for one final six month period into early next year (by law, having served two proper terms he cannot be reappointed).

But there had been nothing to stop the government reappointing Saunders for up to a further full four year term. And given the (on paper) importance of these MPC positions it seemed careless at best, and a bit disconcerting, that the government had not got on and made a permanent appointment (whether Saunders of someone else – although there had been no evidence of any open search process).

But this morning a piece on Business Desk drew my attention to the fact that decisions had been made on both Harris and Saunders. Naturally, one looks to the Minister of Finance Beehive page for an announcement – these are, after all (and in principle) powerful or influential macroeconomic policymakers at a time when inflation is miles outside the target range the MPC was supposed to be delivering – but there was nothing. There was no press release from the Reserve Bank either, but when I checked the Bank’s website page for the MPC sure enough, there it was:

and

The suggestion being, at least in the new Saunders description, that this might have happened a few weeks ago and neither the Minister nor the Bank had thought fit to tell us.

And so then I turned to the repository of all official appointment announcements, the Gazette, where there is this

which is all good and official, but not many macroeconomists and Reserve Bank watchers routinely read the Gazette.

I have no more to say about Harris specifically. He never should have been reappointed for a short term ending in election season, but given that he was an extension to early 2024 was pretty much inevitable (although a short period with a vacancy also wouldn’t have been a problem).

But what of Saunders? She could have been appointed for a full four year term but has been given only 15 months or so. Was she reluctant and had to have her arm twisted to take an extension. Was the Bank’s Board reluctant to recommend her? Was the Minister really not so keen (having, from the papers, first appointed her mainly for her sex). And why was none of its sorted out months ago well before her first time expired. It is hardly a ringing vote of confidence in a macro policymaker, amid a serious policy failure, to be reappointed for such a short period only, especially as the result of her appointment is the end of the external member terms (and all will have done two terms and have to go) are now bunched quite tightly: Harris finishes on 31 March next year, Saunders’ term finishes on 30 June, and the third member (Bob Buckle) has a term finishing on 31 March 2025.

If there were to be a change of government later this year, this combination looks opportune. I wrote a post last year about what a new government could and couldn’t do quickly if they were serious about overhauling the Bank and MPC. They can’t get rid of the Governor (who has just started a second, but final, five year term. But they would be able to (would have to) replace all three external MPC members in fairly short order. It would be an opportunity to insist on a quite different approach (eg the repeal of the blackball on anyone with ongoing macro analytical and research interests and output).

Which from a National Party perspective looks good of the current government. But one is still left wondering why Robertson left things this way. He could have reappointed Saunders for four years, or could have replaced her with someone he was comfortable with for a four year term. Instead, he is leaving the way open for the other side if the election does not go his way.

As I noted the other day, I have several OIA requests in around these appointments, which may (or may not) shed some light. They are perhaps unlikely to tell us why the Minister, the Governor, and the Board chair were so reluctant to let us know about the appointments of these (supposedly) powerful macro policymakers. Perhaps they’d have struggled to craft an honest press release on the achievements of these policymakers in their four years so far, when – for the first time in decades – inflation blasted well away from target, and none of them was prepared to front up with a good story about the inflation outcomes they’ve delivered, let alone the massive financial losses their choices resulted in for the taxpayer.

Perhaps some journalist might seek comment from Robertson, from Orr, from Quigley or from Saunders. Or perhaps even from Nicola Willis who no doubt expects to be in a position to make all those MPC appointments before too long.

Inflation, monetary policy, and accountability

Michael Reddell Monetary policy, MPC

Over the last few days I’ve been reading a few pieces on UK monetary policy and high inflation. The first was a speech from the Deputy Governor responsible for economics and monetary policy, Ben Broadbent (over there senior central bankers actually give serious and thoughtful speeches on things the Bank has responsibility for), and the second was a new paper by long-term adviser, analyst and researcher Tim Congdon. There is a lot of overlap because Congdon’s paper is broader (“Why has inflation come back”) but his analytical approach has tended to emphasise the monetary aggregates, while Broadbent’s speech which is narrower in focus is specifically on the question of what information value for monetary policymakers there is (or isn’t) in the monetary aggregates over the longer term and in the specific context of the inflation of the last couple of years. Both are worth reading.

My own view on the monetary (and credit) aggregates is, I think, pretty much the same as that of most central bankers these days, that the indicator value of these aggregates is typically fairly limited in the world we inhabit (low or – at present – moderate inflation), that any really serious breakout of inflation (think, eg, Argentina) is likely to be accompanied, in some sense or other, by rapid growth in the quantities of money, and that for now while one should never ignore any indicator there isn’t much about inflation developments of the last couple of years that is best explained through the lens of monetary aggregates. Specifically, if bond-buying programmes like the LSAP did anything much to boost inflation, it was not primarily (or at all) through a monetary quantities channel.

Here is some New Zealand data (and an RB chart) on the growth rates of the monetary and credit aggregates over the period since September 2002 when the current inflation target was adopted.

At the Reserve Bank we always used to put more weight on credit developments than on money measures, and credit growth dipped quite materially in the early months of the pandemic, but no model using either monetary or credit aggregates is isolation would have given policymakers (or other forecasters) reason for serious concern about an outbreak of core inflation to rates unprecedented for decades, Indeed – and since we don’t run a price levels targeting system, and thus bygones are treated as bygones – an analyst looking solely or mainly at these indicators would have noticed by mid 2021 that all the annual growth rates were back to around 5 per cent. No one was going to be sounding inflation alarms if their analysis was based largely on those growth rates. Even in the short period when annual money growth exceeded 10 per cent, the growth rates were not very much higher than had been seen not infrequently over 2011-2016 when core inflation was materially undershooting the target.

Each country’s data and experiences are a bit different but as a general proposition I’d be surprised if many central bankers have become any more positive on the short-term indicator value of the monetary aggregates in the last couple of years.

As one final money aggregate chart, here is the level of the New Zealand broad money series relative to the trend over the pre-Covid period since the 2 per cent inflation target was set. Over that almost 18 year period, core inflation averaged 2.2 per cent. At present, broad money is sitting below the trend, and although views currently differ on how much disinflationary pressure is now in the system I’m not aware of anyone who thinks we are about to have a 8-10 per cent drop in the price level, to get back to price levels consistent with long-term average inflation of around 2 per cent.

The UK has become a bit of a poster boy for bad inflation outcomes. Some of the headline numbers have been very bad (up around 10 per cent), but some of that is what happens when a gas price shock hits you (and no monetary policy framework tells a central bank it should try to offset the direct price effects of such a shock). But if we use a common measure of core inflation (CPI ex food and energy), the UK is far from the worst of the advanced economies and has a bit less-bad core inflation outcomes at present than New Zealand (or Australia).

If their central bank hasn’t done a great job, ours has done a bit worse. And the diverse outcomes in this chart remind us – as Congdon explicitly does in his paper – that inflation outcomes are ultimately national in nature, choices by central banks and (by default usually) their political masters. That we have similar core inflation to several countries on the chart – but quite different outcomes to sound and responsible countries towards either ends (Switzerland, Korea, Sweden, Czech Republic eg) – speaks more to similar mistakes made by respective central banks than to anything that was out of the control of the Bank of England or the Reserve Bank of New Zealand.

Two charts in Broadbent’s speech caught my eye. The second (which I’ll come to in a minute) was directly relevant to the inflation mistake. But this was the first on the interest rate effects of central bank bond purchase programmes. The Bank of England, like the RBNZ, believes that QE has macroeconomic effects primarily through interest rate effects (rather than the quantities of fully-remunerated settlement cash balances that are created in the process).

Broadbent reckons that bond purchase programmes have a material announcement effect (what is measured here) when markets are very illiquid. That is no surprise, and probably everyone would agree. But what caught my eye was those “Other QE announcements”. The average of the interest rate effects of those nine announcements is close to (and not significantly different from) zero. Perhaps this particular estimation is wrong, but wouldn’t it be nice if our central bank was producing such charts, and the research supporting them, rather than just handwaving estimates of large number effects, that often conflate March 2020 (and the effects of what the Fed was doing at the same time) with the rest of their highly risky and costly programme?

The other Broadbent chart that caught my eye was this one

Broadbent is using it primarily to make the point that the BOE actually forecast growth in real private consumption stronger than would have been implied by a model incorporating data from the monetary aggregates. But what interested – surprised – me was that they had ended up materially over-forecasting real consumption growth (from the point where the UK’s last lockdown ended). Normally, over-forecasting a key component of domestic demand would probably have been associated with over-forecasting inflation. But not this time (and the biggest error was before, not after, the severe adverse terms of trade shock associated with the Ukraine war)

That got me wondering about the Reserve Bank of New Zealand’s forecasting.

Here are their successive MPS forecasts for real private consumption, starting from the August 2020 MPS which was done after the first and worst national lockdown was over.

The errors in the forecasts for 2022 being made in late 2020 are really huge (for consumption, which is not a particularly volatile component). By mid-2021 (when those BoE forecasts above were done) there were still quite big errors, but not so much about the medium term forecasts but about what the level of consumption spending was at the time the forecasts were being done.

What about real residential investment?

Their forecasts for late 2020 and 2021 undertaken in late 2020 were miles off the mark, substantially understating the level of activity happening already and in the following few quarters. More recently, actuals have undershoot the forecasts done in the second half of the period, probably because of the much higher interest rates that proved to be needed relative to what the Bank had expected a couple of years ago.

And here is real business investment

The Bank was badly misjudging the recent and contemporaneous situation in their August 2020 forecasts. That gap had closed substantially by the November 2020 MPS (a key date because the Bank then had such extremely low medium term inflation forecasts), but as with the private consumption chart shown earlier the forecasts for 2022 were still miles too low. Those errors probably go together, since high consumption demand and activity is typically likely to support high business investment spending. What is interesting is that business investment continued to surprise the Bank on the upside right through to the forecasts being made early last year.

I won’t clutter the post with a comparable GDP chart, but will quote just one illustrative number. In May 2021 I found myself in the curious position: for the first time in a decade, I had become more hawkish than the Bank. With hindsight it is abundantly clear that they should have been raising the OCR by then (and earlier). But their GDP forecasts made in May 2021 for December 2022 proved to be off (under-forecasting) by almost 3.5 per cent. Those are big mistakes.

If there is some mitigation for the BoE in having actually over-forecast the private consumption bounceback (one would want to know more about other components on demand) there is nothing like that in the New Zealand numbers. The Reserve Bank simply misjudged (badly) the strength of key components of domestic demand (and you’d see something similar in for example the unemployment rate forecasts and outcomes), and with it core inflation. One could fairly point out (and I have in previous posts) that many (perhaps almost all) private forecasters made similar mistake. But we – taxpayers and citizens – don’t employ private forecasters to keep core inflation near target; we employ and mandate the Reserve Bank (Governor and MPC) to do so, and they failed.

Which brings me back to those UK papers that started this post. One of the best bits of the Congdon piece was the call for some serious accountability for central bankers.

No one forced top central bankers to take their jobs (most would probably have had little problem getting other roles), and if they thought the mandates they had been given (in both the UK and NZ the finance minister sets the goal) were unachievable or unrealistic they were free to have said so and, if they felt strongly enough, to have resigned. Nobody was compelled to take on a task they believed was simply unachievable. And yet we’ve ended up with (core) inflation well outside target ranges in quite a wide range of countries, including both the UK and New Zealand, with no apparent consequences for any individual central bankers

Congdon proposes (in the UK context) that when inflation is sufficiently far outside the target range, both the Governor and the Deputy Governor should be required to offer their resignation. He doesn’t say so explicitly, but I presume he must mean this as more than the sort of pro forma charade one could imagine it descending to (“of course, I have to offer my resignation but we all know you Chancellor have no intention of accepting it”), involving actual departure from office. And one could, and probably should, broaden the expectation of real sanctions to include all the MPC members. There is (a lot) more scope already in the UK model for individual MPC members to express and record their disagreement with the majority view, but there is room for more, and the serious threat of sanction helps to sharpen incentives to think differently and not simply to (as is an easy incentive in any committee context) to hide behind the committee, and the (in recent cases) badly wrong consensus or majority view. In New Zealand, we have no idea whether any MPC member ever seriously questioned where the Bank’s forecasting and policy were going in 2020 and 2021. We should.

Perhaps what grates most about central bankers (and their masters, who go along with this behaviour) is the utter refusal of almost all of them to ever accept any serious personal responsibility. Here, Orr has repeatedly run his “no regrets” line and when he occasionally departs from it it is just to say that he is sorry New Zealand faced a pandemic and the Ukraine war (ie nothing about anything he or his colleagues are responsible for). He and his chief economist have also tried the line that they couldn’t have done much different – of course raising the OCR one meeting earlier wouldn’t have made much difference, but that isn’t the appropriate test – and there is quite a hint of that sort of defence in Broadbent’s recent speech (where he uses a straw man alternative of looking at what it would have taken to keep headline inflation at target, when the policy focus has never been primarily on headline).

The other day someone sent me a column from a UK newspaper in the wake of various recent BoE comments. The column ended thus

In the spirit of openness that an independent Bank of England is supposed to represent, it should offer a full and frank apology for letting down the British people.

Well, quite. And exactly the same could be said for our Governor and MPC. They made a really big and costly series of mistakes, which cost us (but not them particularly) a great deal of disruption and real economic loss. They failed in a mandate they had voluntarily chosen to accept (and been well-remunerated for). I’m a Christian and so contrition and repentance are pretty central to my world view, and whatever mistakes have been made in the past contrition and repentance go a long way. In public life – and nowhere more than among central bankers – it now seems alien and inconceivable that people could simply front up and acknowledge their mistakes, acknowledge the costs and consequences of those mistakes, and ask for forgiveness.

Instead, we pay the price – massive redistributions, big fluctuations in real purchasing power, overfull employment and then a probable recession, (oh, and don’t forget the $10bn of LSAP losses – an amount that would otherwise have more than covered the Crown’s recent cyclone costs) – and the central bankers just sail onwards enjoying their position, status, salary and so on, not even offering a serious accounting, let alone serious engagement, or any personal loss . Great power (which is what central banks wield) misued with no personal consequences whatever is a very long way from the model of delegated responsibility and accountability that shaped the design of both the UK and New Zealand central banking reforms in recent decades. In New Zealand, that isn’t just the responsibility/failure of Orr and the MPC, but of the Bank’s Board (appointed by the Minister supposedly to serve the public’s interest), the Minister of Finance, and ultimately – as with everything important in a system of government like ours – the Prime Minister.

Decaying institutions

Michael Reddell MPC, Reserve Bank, Reserve Bank Board

Decades ago I worked for a central bank in another country. I woke up one morning to learn that the Governor had been sacked, and by the time I got to work he was clearing his desk. He hadn’t done a bad job – and was one of the more inspiring people I ever worked for – but had fallen foul of the government (Minister of Finance and his colleagues/bosses). The law as it was meant that Governor could be removed whenever the government felt like it. for whatever reason the government felt like. It wasn’t a good model.

In the numerous attempts to capture just how independent various central banks are, one of the dimensions that usually appears is something around the dismissal provisions for key decisionmakers (in these days of committees and board, not just the Governor). Many older pieces of central banking legislation make it very hard to remove the Governor (in particular), removal often requiring things like the bankruptcy, severe mental or physical breakdown/incapacity, or imprisonment (and perhaps even a vote of Parliament). The Reserve Bank of New Zealand Act 1989 was quite unusual for its time, in that it made it easier to remove the Governor, but not because the Minister didn’t like the Governor’s policy calls (and all power was vested in the Governor personally) but if the Governor had failed to deliver on the policy targets he had agreed with the Minister that the Bank would pursue. Under the Act (and rightly so) the Bank didn’t get to define its own goals: the Governor got independence at an operating level to pursue an agreed policy target, and could be removed (at least in principle) if he did a poor job of using the operational independence. The Governor could not be sacked simply because the Minister got annoyed with him, or because the Governor had been appointed or reappointed by a ministerial predecessor of a different party.

That is pretty much as it should be. You can argue (and I long have argued) that even with a well-written law it is hard to make such accountability effective, and the dismissal of a Governor on policy grounds is almost inconceivable (reappointment could, in principle, be another issue) but the balance on paper is probably more or less right.

But these days we have a Monetary Policy Committee to make monetary policy decisions. The government chose to adopt a model in which several external members serve on the MPC, and I’m pretty sure it would not be hard to find speeches from the Minister of Finance championing this innovation and the important contribution people with a diverse range of views and experience would bring to monetary policy decisionmaking.

In principle, appointments to the MPC are at a considerable arms-length from the Minister (the Board proposes candidates and the Minister can’t substitute people he or she prefers). On paper, members of the MPC can’t be removed because the Minister doesn’t like them or because they advocate monetary policies the Minister doesn’t like. It is hard to remove an MPC member

(Actually doing monetary policy in accordance with the Remit is one of the “collective duties”.)

What is more, at least on paper MPC members can only serve two terms, so if there is a bit of an incentive to stay on the right side of the Minister in the run-up to reappointment, at least any such period shouldn’t last long.

If you believe in an operationally independent central bank (and, on balance, I still probably favour one), the basic framework looks good. The Act does actually allow the Minister to explicitly override the Bank on monetary policy, but that has to be done openly and formally, not by the dangling threat of dismissal.

But then the Caroline Saunders term came to end (or so it appeared) and we were sent back to check the statute books. I wrote about it here. There we were reminded that there was a provision for an MPC member to have their term extended for up to six months. This appeared to be a more or less sensible provision given that election timing sometimes interferes with the making of permanent appointments or reappointments to significant government roles (although other than for the Governor hardly a vital provision given that there are seven MPC members in total, and the MPC could probably function just fine for a few months with 5 or 6 members), and it was quite similar to a position in the UK central banking law.

What probably few of us noticed was that the law also contained a provision under which when an MPC member’s term of office ends they can simply remain in office unless or until the Minister of Finance actively appoints another person or tells the person whose term in ending to go.

Caroline Saunders’ first term as an external MPC member expired a month ago and she is still in office (it is now May and the Reserve Bank website shamelessly continues to describe her term ending in April). There has been not a word from the Minister of Finance or the Bank (Board or Governor) as to what is going on. In effect, the Minister of Finance has transformed Saunders’ position from one that looked like an explicit fixed term one to one in which she serves from day to day at the pleasure of the Minister of Finance. Just like my story in the first paragraph. It is a terrible way to be doing things (and a month on is clearly a conscious and deliberate choice by Robertson, not a matter of a few days until last minute reappointment loose ends could have been tied up).

To be clear:

  • there is nothing to have stopped the Minister of Finance formally reappointing Saunders to a further full four year term (at least, so long as the Minister’s handpicked underqualified Board was willing to recommend here),
  • there would have been nothing to have stopped the Minister formally extending Saunders’ term for up to six months (seems not to even require a Board recommendation), a term that itself would have been short but fixed.

But there is no sign that the Minister or the Board have put in place any process to reappoint or replace Saunders (although I have various OIAs in which may shed some light), and instead the Minister has setted for a de facto “dismissable at will, serving at the pleasure of the Minister” model.  It has got no coverage, but it should have, including because it sets a terrible precedent.

Since he has said nothing,and has been exposed to no media or parliamentary scrutiny, I have no idea what is going on in Robertson’s head here.   I don’t really believe that he has done it to exert policy leverage over Saunders (“keep voting a way I’m comfortable with or you’ll be gone tomorrow) both because no one believes the external members wield or attempt to wield any clout, and because Saunders has a day job in other fields (she doesn’t really need the MPC role).  It is also odd because the election is approaching and you’d have assumed this government wouldn’t want to risk leaving an open seat for an incoming Minister to fill early on (they will already be unable to appoint pre-election a replacement for another external MPC member, Peter Harris, whose term expires in October).    Perhaps I’m being too charitable, but whatever the explanation (a) we should be getting one, and (b) if small things are allowed to slide it opens the way to more serious abuses and pressure by others later.   MPC members simply should not be dismissible at will, and at present Caroline Saunders is.   The current situation reflects poorly on the Minister, but also on the Board and the Governor (who have presumably gone along), and actually on Saunders, who if she cares at all about operational independence for monetary policymakers should have insisted that she be reappointed formally or, if not, should have walked (which she could have done with no drama whatever).      An incoming government that was serious about fixing the deficiencies in Robertson’s legislative reform of the Reserve Bank should simply repeal the “serve at the pleasure of the Minister” provision (I am not aware that comparable advanced country central legislation elsewhere has that sort of provision, especially when there is already statutory provision for a short fixed-term extension to deal eg with election timing issues).

Changing tack, I stumbled on this call for papers on the Reserve Bank website the other day

Were it the website of a university sociology department or policy centre it might all be rather unexceptional, but this is the central bank. 

The Reserve Bank of New Zealand Act, freshly minted, sets out objectives for the central bank and functions for the Reserve Bank.  I won’t bore you with another big cut and paste.  Suffice to say, neither of those sections mention, or even hint at, “financial inclusion”.  In fact, the words don’t appear in the Act at all.

Now, the Reserve Bank would no doubt point out the under the new Act there is a new document, the Financial Policy Remit. The first one is here. But the legislation itself makes it clear that whatever the Minister puts in the Remit, it is all about the exercise of the Bank’s statutory powers, fulfilling its statutory functions and purposes. It isn’t licence for the Bank to go spending public money and scarce management focus on just anything it, or even the Minister, might like.

. Much of the Remit wouldn’t get too much argument from most people, and the government’s “desired outcomes” are well within a reasonable range of possible emphases, as guidance for how prudential and crisis management powers should be exercised.

“Inclusive: does get a passing mention there, but over the page under “Other government policy priorities” we get this (1 of 4)

You might, or might not, think that sensible, but…..it has got nothing to do with anything the Reserve Bank has statutory responsibility for, or powers (which can only be exercised for statutory purposes). If there was a policy role for any agency, you might expect them to be turned to MBIE (ministry of subsidies) or The Treasury.

The Reserve Bank got a huge budget increase a few years ago (although the surprise inflation they inflicted on themselves and the rest of us means the real increase is less than they thought), so you might have thought that the Bank had money, time, and staff galore to throw at hosting symposia. In fact, they seem not to have had the resources or the interest in hosting workshops, symposia or conferences on issues they are actually responsible for – including ones where there have been major recent puzzles and failures.

They have a Seminars and Workshops page. Here are the events of the last few years

Readers of a charitable disposition –  shouldn’t we all be? –  might look at that top entry and think “well, that is clearly topical and something they were responsible for”.  Unfortunately, it is also almost two years ago (before either the inflation or LSAP losses were much in focus at all), and as my write-up of the event records, it was much more of a Treasury event with little on monetary policy and no serious policy contribution from any Reserve Bank figure. 

Since then, basically nothing.   The Bank is currently finalising its advice on the next Monetary Policy Remit, and although they took public submissions on that there has been no workshop or conference or call for papers.   Late last year, the Bank published its five-yearly review of the MPC’s conduct of monetary policy, and there has been no workshop or conference or call for papers on any of that.  Serious speeches on monetary policy (let alone financial regulation and supervision, which most Bank staff now work on) are all-but non-existent.  And the Bank publishes no research itself on financial stability or regulatory matters, and hardly any on things relevant to monetary policy.  Lose $10bn of taxpayers’ money and have core inflation blast well beyond the top of the target range, and we get….well, almost nothing.  Not even an apology, let alone some serious engagement, scrutiny and critical review and analysis.

But…..indigenous financial inclusion is apparently where the Governor and Board have decided to establish their research/workshop priorities. 

Of course, many other central banks these days hare off down paths that seem barely relevant to the purposes they were established for (that entire Central Bank Network for Indigenous Inclusion fits that bill –  and won’t anyone think of the Icelanders) but I can’t spot one whose only conference or serious workshop in several years is on something they have no serious responsibility for at all.      Among the almost-countless such events hosted by bits of the ECB or the Fed (yes, they are big economies) the best known is of course the annual Jackson Hole symposium.  These are the topics from the last few years

The Reserve Bank of New Zealand doesn’t have those sorts of resources or the pulling power.  We are a small and not very wealthy country.  But in such countries, scarce public resources should be being used in ways ruthlessly aligned to institutional priorities and statutory functions.  The Reserve Bank’s workshop, by contrast, has the feel of management and the Board plundering the public purse to pursue personal ideological whims and interests.   The same management and Board that displays no interest whatever in serious scrutiny or engagement or research on things they are actually responsible for, where they have made big calls in recent years, some of which have already proved deeply costly.

Jackson Hole it ain’t.

Here, you can go four years and not hear a speech or a paper from even a single external MPC member –  members barred from doing any further research or analysis themselves.  But never mind I suppose they say, it is only taxpayers’ money.

The OIA, the RB, and the MPC

Michael Reddell MPC, OIA, Reserve Bank, Rodger Finlay

One comes to take for granted the gross inadequacies of the Official Information Act, including the systematic under-resourcing of the Ombudsman’s office, which just reinforces the incentives on officials to play fast and loose with the spirit of the law, banking on the fact that if their agency ever loses at the Ombudsman it will be so far down the track that most people – possibly including the requester- will have lost interest in whatever it was the agency didn’t want to release.

But just occasionally it still gets to one. No doubt many requesters have this sort of experience.

I had an email this afternoon from the Ombudsman’s office

It didn’t sound like much of an update – “we are writing to tell you that we have still done nothing about your complaint and have no idea when we will”. I couldn’t even remember what I’d made a complaint about or when. On checking, I found that my complaint was lodged on 3 February. This was the complaint

The original request had been lodged with the Reserve Bank on 10 November 2022

10 November was the day the Reserve Bank released its first five-yearly review of the conduct of monetary policy. They took the best part of three months themselves to withhold almost everything deemed relevant. They did release three documents, which contained almost nothing of substance (that being the point), including this one

which doesn’t really appear to be in scope at all.

As a reminder of the context, this five-yearly report came out amidst inflation having burst well beyond the target range, the MPC having lost taxpayers the best part of $10 billion on the LSAP, and as the MPC was racing to raise the OCR to get inflation back in check.

As I noted in my complaint, one of the oddities of the five-yearly review provision in the Act is that the Bank (management, and I suppose the Board) get to do the review, and yet the MPC is the entity that sets monetary policy, and the MPC includes the three external members who don’t formally answer to the Governor. We know from the finished report what the Governor thinks of the MPC’s stewardship – and as a reminder management has the majority of the votes – but we know almost nothing at all about what the external MPC members thought. Did they reflect differently on the Covid period than management did? Or did they perhaps not reflect very seriously at all? Did their views or input (if any) have any impact on the substance of management’s report?

You might have thought that disclosing MPC members’ views, or input to the report, might be the very least sort of effective public accountability for the considerable power they helped wield, the considerable and hugely costly the mistakes they helped make.

Perhaps one day we will get an answer. But the Reserve Bank – like so many government agencies around town – knows that it only needs to say no, and if the requester can even be bothered complaining that it could be 12-18 months or more before there is any hope of the Ombudsman getting round to addressing the complaint. Meanwhile, the external MPC members (and management) go on wielding their power and collecting their salaries.

But it does remind me that I had overlooked lodging a complaint with the Ombudsman about the Bank’s bare-faced obstructionism in the matter of the appointment of the chair of the majority owner of a large bank being appointed to the board of the Reserve Bank, an appointment almost certainly done with the acquiescence (or worse) of the Governor.