OCR leak

The OCR leak

Michael Reddell OCR leak, Reserve Bank

The Reserve Bank has this afternoon released the Deloitte report into the possible leak of the OCR on 10 March, and a press statement from the Governor.

I have given comments to various media outlets, but thought I should set down my assessment for the record.

It is extremely disappointing that it has now been confirmed that there was a leak.  One MediaWorks employee in the media lock-up apparently emailed several of his colleagues outside the lock-up.  My involvement in this unfortunate episode arose because a MediaWorks employee sent me the email that is reproduced in the Deloitte report.

It is unfortunate that the Deloitte report does not (and probably was not asked to) look into how it was that the Reserve Bank’s systems for managing lock-ups for incredibly sensitive information were as insecure as they proved to be.  From the Deloitte report it seems that no underhand technology or secret signaling was involved; simply someone emailing from their laptop.  I’m no technology expert, but I’m staggered that such an easy breach could have occurred.  When systems are weak, sooner or later they will result in a breach, by accident or deliberately.   It is also unfortunate that the Governor’s press release does not address this issue.

The Reserve Bank’s overall response to the confirmation of the leak is the right one.  Ending media and analyst lock-ups is a step I recommended in a post several weeks ago, reflecting the vulnerability of such events (especially as technology has advanced), the fact that few or no other central banks provide any advance information in lock-ups, and the fact that such lock-ups have at times meant people inside the lock-ups have better information on the Bank’s interpretation of the documents than people who do not attend such events.    The new model will bring the Reserve Bank into line with standard international practice.  It is a model that would, I hope, have been adopted even if it had been confirmed that on this particular occasion no leak had occurred.

There are further steps that should still be adopted to minimize the risks of inadvertent early releases of the OCR.  For example, the lengthy lag between taking the OCR decision and releasing it should be shortened.  I was also surprised to learn from the Deloitte report that the Minister of Finance had been aware of the decision before 8:04am on the morning of the release.  When the OCR system was established in 1999, the practice was to advise the Minister only 10 minutes or so before the announcement.  If the Minister needs to know at all (and it isn’t clear why), 10 minutes notice should be an ample courtesy.

The Governor’s press release was disappointing on several counts.

First, it took no responsibility at all for the Bank having run systems and procedures that allowed this leak to have happened.  Of course, the leaker should not have leaked, but the Reserve Bank should have managed its procedures in a much more robust way to ensure that the leak could simply not have happened (especially in the easy way it appears to have).

Second, I was struck by the grudging gracelessness of the statement.  This inquiry, the associated discovery, and the subsequent change of procedures, would not have happened if I had not, at my own voluntary initiative, informed the Bank of the information I received.  It is as simple as that.  Unlike those in the lock-up and their employers, I am in no relationship of trust with the Bank, owe nothing in particular to them, and had actually valued the outlet that MediaWorks from time to time had provided for my commentaries and views.  And yet the statement offers not a word of appreciation or thanks to me; instead it criticizes me for not telling them about the information earlier.

“The fact that several people outside the Bank, who had access to the information improperly, failed to alert the Bank immediately, was irresponsible and left open a significant risk that the Bank could have closed down quickly with an immediate official release.”

As I have been clear all along, I never knew (until today) whether there had been a leak, or whether someone was just engaging in some big talk.   And the fact that there had been no market movement made me reluctant to believe there was a real leak –  as did the fact that I had worked at senior levels at the Bank for many years, and been under the impression that security at the lock-ups was fairly water-tight.

Moreover, as readers know, the Bank’s attitude towards me over the last year has not exactly been positive and cooperative.  Perhaps I could have gone to them at 8:20 and said “someone just told me you are cutting this morning”.  In fact, the thought didn’t cross my mind initially.  But when it did, my reaction was “what if they aren’t cutting.  They will simply scoff, and say “there goes Michael again””.  And so I kept the email to myself –  still not sure whether it was real news or not –  until I knew the Bank had cut, whereupon I passed the information on to the Assistant Governor and the Head of Communications.

I gather this “Michael was at fault” line is now part of their stock response (someone this afternoon told me that John McDermott had run that line to him previously).

MediaWorks people were at fault, and the Bank had weak systems that allowed a serious leak to occur.  Had I been less professional and more opportunistic, I could have put the text of the email on my blog as soon as I found it. After all, I was in no relationship of trust with the Reserve Bank.  Unsure whether it was for real or not, I reckon I still have enough credibility that doing so would have created a lot of damage.  But I didn’t do that: I kept it to myself and instead I told the Bank about it as soon as I was sure I was not going to look stupid.  I was simply caught in the middle of this – and have spent several weeks with people suggesting or implying that I had made it all up, was making allegations etc

The Governor is also misleading to suggest that even if I had alerted them earlier they could have avoided problems by immediately releasing the information themselves.  That might have been their reaction –  although they would surely have had to ask how seriously to take my information –  but it wouldn’t saved chaos, and might only have made things worse.  The hour before the OCR is released is a dead zone in New Zealand markets.  Many people abroad focus on New Zealand again just a few minutes before the scheduled time of the release.  To have released at 8:35. generating huge market movements, when they couldn’t even be sure that a leak had occurred (a week later they were still just talking of me making “allegations”) would have made life a lot harder for them, with plenty of aggrieved and vocal offshore people.

I guess I wouldn’t really have expected gratitude, but the graceless (and blame-shifting)  tone of the Governor’s statement is really something that should have been beneath the dignity of someone so senior.

 

 

Central bank communications

Michael Reddell OCR leak, Reserve Bank

I had not been going to write any more now about the Reserve Bank’s investigation into the possible OCR leak (I voluntarily passed them hard but partial information; what conclusions they are able to draw from that information is up to them)  and the related, more important, issues of how they handle releases, lock-ups etc.  But overnight Marek Petrus, former communications director at the Czech central bank, got in touch and drew my attention to a couple of posts on the issue which he had put on his own very interesting blog, Lombard Rates.  He has also left a substantial comment on my earlier post on reforming Reserve Bank releases.

Petrus’s two posts are here (more specific) and here (more general).  He argues as follows

Based on my experience, organizing lock-ups for interest rate-decision releases is not a standard, wide-spread practice among central banks.

As far as I know, few central banks provide information on rate decisions under embargo, be it via lock-ups or other means (the Czech National Bank, where I set up that lock-up regime for news agencies some years ago, is one of those few).

Still, lock-ups do make sense, but mostly for technical, complex matters that require a lot of explanation (a specific example is releasing Inflation Reports or Financial Stability Reports). Providing information on a rate decision and the main reasons behind such decision under an embargo longer than, say, 5-10 minutes is not worth the risk.

My suggestion for the RBNZ, or any central bank considering ways to employ or redesign an embargo technique, would be to organize the standard lock-ups only to provide detailed explanations on complex publications or complicated technical, regulatory matters. The most market sensitive information (such as the rate announcement) should either be released under no embargo at all, or be made available to a small group of journalists via a tight, 10-15 minute lock-up. That would help reporters get the facts right and avoid making a factual error under stress.

No market participant or analyst should have access to this sensitive kind of information before the official release. That to me is the first line of defense against an embarrassing information leak. Afterwards, an open press conference could be held for journalists and TV cameras, and a separate background seminar organized for analysts, to explain the decision and answer detailed questions. However, this press conference and the background seminar are, as rule held, only after a rate decision has been published, and has thus become part of public domain.

I agree with the gist of these comments, although I’m not sure about holding background briefings for analysts after the release.  When we first did Monetary Policy Statements in New Zealand we did exactly that, but the sessions were not popular (clients wanted immediate explanations, and after that the market economists wanted to move on to other things).  Perhaps more importantly, comments on the monetary policy outlook and projections should be made openly and on-the-record or not at all.

UPDATE: Petrus has got in touch to clarify what he meant about an analysts’ briefing:

I did not mean to suggest that a seminar for analysts should be organised behind closed doors (i.e. only on background).

Quite the opposite: It should be made public, streamed live as a video webcast and later made available online as a video recording. By writing about “background seminar”, I meant to say that background and detailed information about a policy decision and the latest forecast should be routinely provided by a central bank via such analyst meetings.

The most transparent central banks, such as Sweden’s Riksbank and the Czech National Bank, make such analyst meetings public by providing a live webcast and making the video recording available via online services such as YouTube for every member of the public to watch.

See for instance: https://www.youtube.com/playlist?list=PL7V-SFaHLX4LcIZjld51kktczHEj36hJ9

That would appear to be an excellent approach for our Reserve Bank to consider adopting.

The inquiry into the possible OCR leak

Michael Reddell OCR leak, Uncategorized

I see that Stuff has an article up about the Reserve Bank’s inquiry into the possible leak of the OCR decision.

Michael Reddell, a former senior economist at the Reserve Bank, who now runs a blog which has been sharply critical of the central bank, claims he was told that the official cash rate (OCR) would be cut an hour before the decision was announced.

The Reserve Bank has confirmed that following an allegation, it had launched an investigation.

“We are aware of an allegation that information may have been leaked ahead of the OCR announcement on 10 March,” a spokesman of the bank said.

There is no “claims” about it. I have given a copy of the email (minus the name of the sender) I received at 8:04am on the OCR release day to the Reserve Bank’s inquiry.  That email read as follows:

We have just heard that the Reserve Bank is cutting by 25 basis points.

I have been consistently clear that the email in its own right is not confirmation that a leak occurred,  but it is troubling nonetheless, and raises the serious possibility of a leak.  When I drew the matter to the attention of the Reserve Bank, they also expressed immediate concern and appropriately moved to initiate an inquiry.

When I first received the email, I was not sure what to make of it.  I checked the exchange rate pages and was relieved to find there had been no movement.  I also wasn’t sure whether to believe the report  –  after all, a cut was not widely expected that day.  Seeing no movement in the exchange rate, not being sure if the report was accurate (and not wanting to be scoffed at by the Bank if they weren’t in fact cutting), and knowing that the key Reserve Bank people would in any case  be in lock-ups, I did not pass on the information to the Reserve Bank (John McDermott and Mike Hannah) until shortly after 9am on MPS day.

I still fervently hope that the investigation is able firmly to conclude that no leak occurred.  Regardless of whether it did or not, the risk of leaks remains and the Bank would be wise to tighten up its procedures and further reduce the risks.

 

 

 

Reforming Reserve Bank releases

Michael Reddell Governance, OCR leak, Reserve Bank

I went into town this morning to talk to the Reserve Bank’s inquiry looking into the possible leak of last week’s OCR announcement (see last paragraph here).  I still have no idea whether there really was a leak, but it seems likely, and if so it seems likely to have come from one or other of the lock-ups the Bank runs, for analysts and for the media.

But the discussion this morning got me thinking again about some of the Reserve Bank’s processes around OCR decisions and Monetary Policy Statements. Insiders will recognize some old familiar arguments.

In many ways, it is remarkable that the Reserve Bank has not had an OCR leak, deliberate or inadvertent, before now (the memory of a couple of other earlier ones –  one deliberate and wilful, one inadvertent, are still seared in my memory).  As the Governor noted in his press conference last week, the decision to cut the OCR had been made the previous Friday –  six days before the announcement.  That delay is shorter than it used to be –  at one stage, the OCR decision was being made more than two weeks prior to release – but much much longer that it needs to be, or than is the typical practice in other countries.  In other countries, official interest rate decisions are typically announced within hours of the decision being made.  Draft news releases announcing the decision (and covering the range of possible options) must be part of the package of papers before the respective decision-making committees.

Delays have not always been that long in New Zealand. Prior to the introduction of the OCR in 1999, the Governor used to finalise any announcement on monetary policy (since we weren’t setting a specific interest rate, the announcements were more about the Bank’s overall take on things) at a 7:30am meeting in his office on the morning of the release of the Monetary Policy Statement.

The long lag between the Governor taking the OCR decision and the release of that decision arises solely because the Reserve Bank has chosen to release, four times a year, Monetary Policy Statements at exactly the same time as the OCR announcement (in fact the OCR announcement on these occasions is chapter one of the Monetary Policy Statement).  Long documents take much longer to finalise than one page OCR announcements do.

But there is no need for the two documents to be so intertwined.  Other central banks typically don’t do it that way.  In fact, in law, the Reserve Bank only has to publish two MPSs a year.    And, frankly, the MPSs (which are shorter than they used to be) often don’t add very much beyond what was in press release –  or certainly not much that couldn’t wait for a few days.  I’d favour the Bank moving to a system of monthly OCR reviews (well, 11 months a year), making the announcement the day the decision is made, and moving to publish two, or at most three, Monetary Policy Statements a year, not tied to the date of any particular OCR announcement.  On the one hand, it would improve security and markedly reduce the opportunity for inadvertent leaks, and on the other it might encourage the MPSs to become vehicles for more substantial background analysis and evaluation, along the lines of what the statutory provisions seems to envisage.

The counter-argument, of course, is that monetary policy is forecast-based, and so we need to see the forecasts to make sense of the policy.  It is fine argument in principle, but bears little relationship to reality.  Mostly, central banks respond to the immediate flow of data.  Yes, those data have implications for what happens in future, but almost all the information is typically in the initial revision of view –  about where things are right now, or perhaps a few months ago.  And, of course, as anyone who has been inside these processes knows, the forecasts are often adjusted to reflected the Governor’s priors about policy and policy messaging (the stuff dealt with in a couple of paragraphs in the press release).  That isn’t a criticism –  we know so little about the future that I think it is mostly right, proper and sensible as an approach.  But a full set of forecasts, and all the commentary that goes with them just isn’t necessary for the policy messages to be got across effectively. In fact, often less text is better than more on a policy announcement day –  there is less chance of inadvertent differences of emphasis etc.

My other suggestion is to consider discontinuing lockups.    Other central banks typically (as far as I know) don’t do them: they put the policy announcement out in the public domain, including as much or as little elaboration in the statement as the occasion warrants, and leave it to analysts and markets to work it out for themselves (sometimes with the benefit of later, open, press conferences).

There is case for lock-ups for some sorts of releases.  Government budgets seem like a reasonable example, when there is a multitude of announcements, often of complex unfamiliar material.  Or the release of major in-depth reports on some specialized aspect of government (which might be hard to report well, but perhaps not very market-sensitive).  It isn’t obvious that OCR announcements fit that bill.

Of course, the Bank does not typically do lockups for the OCR announcements that don’t come as part of Monetary Policy Statements, suggesting that –  in principle at least –  the Bank agrees that OCR announcements don’t need lockups.  The lockups must be for the rest of the MPS documents.  But they are quite familiar in structure and content, and little of the content is particularly complex or unfamiliar.

The Bank’s lock-ups come with two sets of risks.  The first is the risk of leaks.  The information in OCR announcements is enormously market sensitive –  look at how much and how quickly the exchange rate moved on last week’s announcement, creating a huge incentive for someone to try to cheat.  40 years ago it might have easy to secure people in an ordinary room, with no risk of them being able to communicate with outsiders.  Central bankers weren’t at much of a disadvantage in managing those who might want to cheat.  It is hard to believe that the playing field is quite so level these days, with all the advances in technology, including very small scale technology.   At least while I was at the Bank, the analysts’ lock-up used to occur in a room in which people could be seen quite easily from neighbouring apartments (other clever ways of signaling, getting round the rules, were covered in this recent New Yorker article –  more, outside fiction, than I had ever read about bridge).  Perhaps no one ever abused the systems, but why take the chance that someone one day finds (or just exploits) a way around the Bank’s precautions?       Perhaps they did last week.

The second risk, and perhaps more often practically important, is that the lock-ups are not just occasions when people are shut in a room with a document and left to digest it.  In these lock-ups staff, often quite senior staff, are available to answer questions and offer clarifying comments.  There is often plenty of ambiguity around Reserve Bank statements –  it isn’t like the specifics of a technical Budget announcement  –  and that creates the risk that attendees of a lock-up get information on the Bank’s views and interpretations that isn’t available to everyone else, or that people get slightly different messages depending on who they happen to talk to in the lock-ups.

It is quite valid for the Reserve Bank to have messages it wants to convey with OCR releases.  Those messages should be written down –  debated and refined internally as required –  and then be available to everyone. Further comment shouldn’t really be necessary, but if it is necessary or desirable to have occasional press conferences then at least (as the Bank does) they can be audible/visible to all (via the webcast).

On another, different, Reserve Bank topic, I was talking the other day to a business person who had been visited by Reserve Bank staff on their regular business visits, gathering conjunctural information.  This person told me that he had asked the staff whether the Bank was doing any work on reforming the governance of the institution. The staff apparently responded that they were doing so.

If this report is accurate it is quite newsworthy.  Previous reports had led us to believe that the Bank had done extensive work on possible governance reforms, but had completed the project.  They would not release any of the papers relating to the work.  Information that The Treasury released a few months ago confirmed that the Bank’s work has been discontinued, and that the Minister of Finance had indicated (against Treasury’s preferences) that he did not want work in that area continued with.  Perhaps some journalist might care to ask the Bank whether this report is accurate, and whether they do have work underway on governance reforms.  If they do, and if the Minister is becoming more interested, that would be very welcome news.   But perhaps some young economist just had the wrong end of the stick, or misinterpreted the question?

Really just the bare minimum

Michael Reddell Monetary policy, OCR leak

The Reserve Bank of New Zealand hasn’t had a good couple of years.  There was the  totally unnecessarily 2014 tightening cycle that was only slowly, and rather grudgingly, reversed.  More recently, we had the OCR cut in December that drove the exchange rate up, and then the Governor’s fairly strident (and defensive) speech early last month which convinced even most of the doves that he would take quite some convincing to cut the OCR again, only to move (and signal yet another easing) at the very next OCR review a few weeks later.   I don’t do on-the-record advance predictions of individual decisions, but I noted a few days ago to someone who asked that I thought a rate cut today was much more of a possibility than most of the local commentators, or market prices, were reflecting.  Nonetheless, today’s move was a pleasant, if mild, surprise.

And it is a surprise of timing, rather than of any sign that the Reserve Bank has really altered the way it is looking at things.  In the December MPS, with the OCR projected to stay at 2.5 per cent indefinitely, the inflation rate was expected to take two years to get back to the target midpoint.  And in today’s MPS, with the OCR projected to get quickly to 2 per cent and stay there indefinitely, the inflation rate is expected to take two years to get back to the target midpoint.    After so many years with inflation below the target midpoint, the Bank is still open to the charge one questioner at the press conference put to them, that they are running an asymmetric monetary policy –  quite relaxed about inflation below the midpoint of the target, but much less so about anything above the midpoint.  I don’t yet subscribe to that interpretation myself –  it is more a case of still having the wrong “model” of what is going on –  but I can understand those who see it differently.

Part of where they are going wrong is in the constant repetition of the claim that monetary policy, here and abroad, is very stimulatory.  In chapter one, the Governor again talks of “extraordinary monetary accommodation” overseas, and in chapter 2 he tells us he believes New Zealand interest rates are “very stimulatory”.    We can all accept that nominal interest rates, here and abroad, are low by, say, the standards of the previous 20 years.  But when interest rates aren’t much different than they have been for the now seven years since the worst of the crisis past, and all the while growth has been sluggish, inflation quiescent, and in most countries unemployment rates show no sign of labour markets overheating, it is difficult to know what meaning the Bank is attaching to phrases such as “very stimulatory”.  I know they are on record as believing that a neutral interest rate in New Zealand is 4.5 per cent, but if they really still practically believe that they most be some of the only people who do.  We know so little about neutral interest rates at present that it is simply unhelpful to talk of current policy being “very stimulatory”, especially if that view is feeding into the forecasts.  Probably all we can say is that policy is  easier today than it was yesterday.  But not even necessarily easier than three months ago.

I’ve pointed out before that, if anything, real interest rates (the better basis for any judgements) have been rising. not falling.  Here is the OCR updated to today, deflated by the two-year ahead measure of inflation expectations, for the last four years.

real ocr to march mps

One problem for the Bank’s story is that today’s OCR cut is barely enough to offset the fall in inflation expectations (on this particular measure or others) since the last MPS.  There is no cut in real interest rates over three months.   And as the Bank usefully highlighted, longer-term funding cost margins have been rising for some time.

funding costs

The Bank won’t want banks avoiding the longer-term funding markets –  a much larger share of longer-term funding was one of the useful post-2008 changes  – and so as things stand at present a cut or two in the nominal OCR may not be enough even to prevent real borrowing rates rising.   What has been done today is really the bare minimum that had to be done to avoid further amplifying the adverse consequences of past monetary policy mistakes.

I wanted to comment on three other aspects of the analysis or discussion in the MPS.

The first is around immigration.  At the last MPS the Bank made a fairly dramatic change of view.  They  explicitly shifted from the longstanding widely-shared view  –  supported by their own past published research – that the short-term demand effects of swings in immigration were generally greater than the short-term supply effects, choosing instead to adopt a view that either the demand and supply effects are roughly equal, or that the supply effects may even exceed the demand effects.  I asked for the background analysis or research supported this change of view. They flatly refused to release any of it (a matter currently before the Ombudsman). They said that they were preparing material in this area “with a view to publication” and I had wondered if ,say a new Analytical Note might come out today.  But there is still nothing –  no new publications, no substantive analysis in the MPS (nor even any recognition that the PLT data seriously understate what happened in the previous 2002/03 boom), just nothing.  It isn’t good enough, for a variable that is so important to short-term macro developments in New Zealand.

The second is around core inflation.  The Governor has gone out on something of a limb, explicitly relying on the sectoral core factor model measure of inflation to justify his stance.  As I’ve noted previously, it has been very unusual for the Bank to highlight any single core measure, and especially in key policy statements –  and yet the Governor has now done so in his January statement, in his February speech, and again in the press release today.  No analysis his been provided to support his preference –  and none of the market commentaries which have looked into the matter have seemed particularly persuaded.

In fact, it looks as though the staff don’t really buy into the Governor’s story either.

Here is the very sensible text from chapter 4 of the MPS

core inflation text

No mention of any priority being given to the sectoral core factor model.

And here is the chart (I’d previously highlighted how the Bank had used exactly this sort of chart when it introduced the sectoral core factor model to wider circulation).

core inflation chart

There are six measures in that chart.  The average of those six looks to be uncomfortably close to 1 per cent, the very bottom of the target range, and a very long way from the 2 per cent midpoint the Governor signed up for.

Rather more concerning than either of these points is the Bank’s repeated insistence –  in the text and at the press conference-  that longer-term inflation expectations are still “well-anchored at 2 per cent”   (not even “near” 2 per cent, bur “at” it).

They apparently have some new publications coming out soon on some of these issues, which will be welcome.  But for the moment, it isn’t clear quite what they are relying on for their view that there is no real problem with inflation expectations, let alone why they think that long-term inflation expectations (as distinct from something like a one to two year horizon) are what matter.  I discussed some of these issues here, noting that (a) very few people entered into fixed nominal contracts for any period remotely as long as 10 years, (b) that the longer-term survey measures relied entirely on economists’ forecasts.  Add to that the fact that, although the Governor said this morning that the Bank looks at market-based measures of inflation expectations, the implicit long-term inflation expectations derived from indexed and conventional government bonds get not a single mention in the entire document.    Those implicit expectations are currently just under 1 per cent –  on average, for ten years.

I’m not suggesting that these implicit expectations are a perfect representation of actual long-term expectations.  As I noted a few weeks ago, if forced to put a number on my 10 year ahead expectations, I might still say 2 per cent – recognizing that 10 years is quite a long time for conditions, and senior central bankers, to change.  But not to mention them at all seems like quite a stretch, especially when you rely instead on the expectations of a handful of economists.  And, as the Bank points out in a gotcha chart on page 8 of the MPS, if the Reserve Bank’s forecasts of inflation in recent years have been bad, those of other published domestic forecasters (ie the same economists whose inflation expectations they rely for support) have been even worse.

How much does any of this matter?

I suspect inflation expectations are less important, as some independent factor determining inflation, than the Bank or conventional wisdom would suggest.  But to the extent expectations matter they are those for 1-2 years ahead –  all now uncomfortably low.  Anything beyond that, except for bondholders, is largely of academic interest only.    But those shorter-term expectations are largely shaped by the recent trends in actual inflation.  In other words, expectations measures are a lagging indicator of something we’ve already seen (the trend in actual inflation).  The Bank has been somewhat spooked by the drop in shorter-term expectations and in a sense that is welcome –  a belated recognition that there was actually a problem with policy.  But to the extent that they so vocally continue to protest that nothing is really wrong over longer-term horizons, is a measure of how far they still are from really “getting” what has been going on. All else equal, we should expect core inflation to continue to surprise them on the low side.  They need to get inflation back up and keep it up, but there is still no sense of doing more than the bare minimum.

And three last points:

The Governor foreshadowed in his press conference an interesting issue of the Bulletin due out next week on the results of stress-testing of the dairy books of the five largest banks.  I will no doubt write about that in more detail then, but the scenario apparently involved three more seasons of a payout of around current levels, resulting inter alia in around a 40 per cent fall in dairy farm prices.  On that scenario, 44 per cent of dairy debt would be impaired, and 10-15 per cent would be in default.   If we assumed a loss given default of perhaps 50 per cent of the loan, the banking system could face losses of several billion dollars over a period of several years (especially once losses on other commercial lending associated with dairy regions were factored in) That is a lot of money, but it would not threaten the soundness of the banking system –  the capital of the banking system, at last report, was almost $36 billion, well above regulatory minima, and banks have several years to replenish any losses through other retained earnings or –  at a pinch –  by direct recapitalization from the parents.   It might seem not-very-extreme to do a stress test based on a continuation of the current payout, but equally it is difficult (although not impossible)  to believe that the exchange rate would remain anywhere around current levels if international dairy prices remained at current levels for the next few years.

Penultimately, the next time the Governor or the Minister of Finance tells you the economy has been moving along just fine, it might be worth digging out this chart from the MPS.

consumption pc

Consumption per capita showing almost zero growth over the most recent year isn’t an encouraging story.  As economists will tell you, the assumed purpose of economic life is to consume.

And finally, as I have noted to them, the Reserve Bank might want look to the security of its systems.  I had an email out of the blue at around 8 this morning-  most definitely not from someone in the Bank –  telling me that the sender had just heard that the OCR was to be cut by 25 basis points.  I have no way of knowing if it was the fruit of a leak, or just inspired speculation, and was relieved to see the foreign exchange markets weren’t moving, but it wasn’t a good look.