Thinking about senior central bank appointments

The Bank of England lost a Deputy Governor the other day.  The Hon. Charlotte Hogg had been chief operating officer of the Bank of England for the last few years, and was recently appointed by the Chancellor of the Exchequer as Deputy Governor (with responsibility for banking and markets).    She was apparently quite highly-regarded, as well as being a scion of the British establishment (both her father and mother are peers in their own right, her mother was head of John Major’s Downing St policy unit, and her father, grandfather, and great-grandfather were all viscounts and Cabinet ministers).

Senior appointees to Bank of England roles (both top executive positions and the non-executive appointees to the decisionmaking committees on monetary policy and regulatory matters) are subject to confirmation hearings before a parliamentary select committee.     The select committee doesn’t get to decide whether the appointees get the job –  so it isn’t like the US system –  but they can ask hard questions, and can write and publish reports on the suitability of a candidate.  The House of Commons is large enough that there are plenty of MPs who either never will be ministers, or have already had a term as a minister,  That seems to make them  –  even those from the governing party – more willing to ask hard questions than one might expect.

In the course of her confirmation hearings, it became apparent that Hogg had not declared and disclosed to the Bank of England that her brother was head of group strategy for Barclays –  holding a senior position (including involvement in regulatory matters) in one of the largest UK banks, and one for which the Bank of England has supervisory responsibility.    Worse still, earlier in the hearings she suggested to MPs that she had in fact done so.

It is a strange story.  At one point in this episode, Hogg had declared that she was totally confident she had complied with all the Bank’s codes of conduct because “I wrote them”.   Even if so, how it never occurred to her to ensure she disclosed her brother’s position –  erring on the safe side if nothing else –  is a bit of a puzzle.  I’m also quite surprised that it wasn’t known and recognised within the Bank anyway –  they are hands-on supervisors, Barclays is a big and important bank, and the brother’s name would be familiar to anyone with a modicum of knowledge of modern British political history.

The Treasury select committee published a fairly forthrightly critical report, and shortly before it was published Hogg announced that she will resign.  The Guardian has is a nice summary of the story.

There is no suggestion of any substantive inappropriate conduct (whether information being passed, or behaviour influenced) beyond the non-disclosure itself.  But the resignation is the sort of standard we should expect from holders of high, and powerful, public offices.  As Hogg herself put it

“We as public servants should not merely meet but exceed the standards we expect of others.”

Regulatory agencies require punctilious adherence to the rules by those they regulate.  They weaken their own moral position if their own people aren’t held to at least those sorts of standards.

But as I read and thought about the Hogg story, it got me thinking again about our own Reserve Bank, and holders of senior positions there.

The Governor of the Reserve Bank exercises an enormous amount of power –  far more, personally, albeit in a smaller economy and financial system –  than the Governor of the Bank of England.  In that institution, most of the policymaking powers are spread across committees in which the Governor has only a single vote, and where most of the members are either executives not appointed by him or are non-executives.  And yet there is nothing like the confirmation hearings process here.  Most of the appointment power doesn’t even rest with the Minister of Finance –  who can be grilled in Parliament – but with the barely-visible Board members, who themselves face no parliamentary scrutiny.  Like the Bank of England, our Reserve Bank has a couple of deputy governors –  statutory positions.   Holders of those roles don’t have formal voting power –  unlike at the Bank of England –  but there is also no parliamentary scrutiny.  (There were suggestions that a former Deputy Governor was allowed to keep share options in an institution whose New Zealand subsidiary he was responsible for regulating.  If so,  external scrutiny at the time of appointment might have challenged that.)

Compared to the British system, in particular, our system is riddled with democratic deficits:  too much power in one person’s hands, the appointment of that person largely in the hands of non-elected appointees, and no parliamentary scrutiny on appointment of any of these statutory positions (Governor, Board, deputy governors).

In the aftermath of the Charlotte Hogg affair there were curious suggestions of unequal treatment.  Former Chancellor of the Exchequer, George Osborne, is quoted as saying

“Would she have gone if she had been an older man whose sister worked at a bank? I wonder,”

One can only respond “well, I certainly hope so”.

But again, contrast the position at the Bank of England with that at the Reserve Bank of New Zealand.  Hogg was the third female Deputy Governor of the Bank of England.    On the Bank’s statutory decision-making committees, two of the nine members of the Monetary Policy Committee are women, as are two of the members of the Prudential Regulatory Committe, and one member of the Financial Stability Committee. (Hogg serves on all three.)

The Reserve Bank of New Zealand has never had a female Governor or Deputy Governor.  Looking at the current organisation chart, two senior management roles are held by women, but they are both third tier internal corporate positions.    There has never been a more senior woman in the Bank, and thus none of the core statutory policy areas (monetary policy, financial regulation and stability, financial markets) has ever been headed by a woman.  There is no woman on the Governing Committee, and unless things have changed markedly in the last two years, there aren’t (m)any women managers in those core areas either. In fact, it is only about five or six years since the most senior woman in the core policy areas was made redundant.  There are plenty of able women further down the organisation, and I still recall –  35 years on –  the fearsome grilling I got from one smart woman in an interview when I applied to join the Bank, but none in the core senior positions.    (There are women on the Bank’s Board, but it of course has no role in policymaking.)

Quite why this is so is a bit of a mystery.  I doubt it is a result of direct or conscious discrimination –  although decades ago, women had to retire from the career staff if they got married.   And while macroeconomics and markets tend to be areas more men gravitate to than women, Janet Yellen chairs the Fed, and the Bank of England has managed three female deputy governors in the last 15 years.   And even across the Tasman, two of three Assistant Governors in the core policy areas  of the Reserve Bank of Australia are female.

But, whatever explains the patterns up till now, it must surely become a bit of an issue sometimes soon; perhaps one for the Minister and the Board in considering future appointments, and perhaps too for MPs and lobby groups wondering quite how the Reserve Bank appears to have remained so male-dominated for so long.

If one runs through the standard sorts of list of people who might be possibilities to become Governor next March, there are no female names  (Bascand, Orr, Carr, Sherwin, Archer and so on).  And if one restricts the field to that sort of background, I don’t think it is just because people have inadvertently overlooked the female names.   There are no women I’m aware of in New Zealand who hold, or have held, senior-level macro or banking regulatory roles –  eg one could look around the Reserve Bank or the Treasury, or the more prominent of the market economists and commentators and find none.

But perhaps it is time to cast the net wider?  That might be sensible anyway.  It seems likely that the next Governor will lead and preside over some potentially quite significant governance changes, and in many ways the organisation needs revitalising and opening up.  One could make a pretty compelling case for the appointment of a person with strong change management capabilities, rather than a more traditional economist.  Character and judgement would still always be vitally important, but they might be less important than the specific technical expertise.  In this case, after all, we know that there will be not just a new Governor but also at least one, and possibly two, new deputy governors –  and in any top team, there is a need for a complementary set of skills, not just clones of each other.    I’m not that familiar with many senior business figures but, for example, one of our major commercial banks is already, apparently very ably, led by a woman.

I could add that, to the extent that this surprising under-representation of women does concern those in power, my proposal to reform Reserve Bank governance to establish a couple of statutory decisionmaking committees (a Monetary Policy Committee and a Prudential Policy Committee) would also more quickly up more roles to which the Minister of Finance could appoint able women.  There shouldn’t be any real shortage of suitable candidates to be considered.

On the topic of gubernatorial appointments, readers might recall that when the Minister of Finance last month deferred the appointment of a new Governor until well after the election, giving deputy governor, Grant Spencer, a six month term as acting Governor, I raised questions as to whether this appointment was strictly lawfully permissible.  As I stressed then, I had no particular concerns about Grant himself, and had actually been suggesting for some time a variant of the same solution –  giving Graeme Wheeler a short extension, if he had been willing to accept it.  But the Act doesn’t seem to be written in a way that allows a new person to be appointed, with no Policy Targets Agreement, for such a short period.

Because there were no clear answers from the government, and no pro-active release of the relevant papers, I asked for copies of the relevant papers from (a) the Minister, (b) the Treasury, and (c) the Reserve Bank Board.  I didn’t really envisage it as a burdensome request, and although I was sure they would withhold any formal legal advice they had, I was interested in the advice the various agencies had provided to the Minister and Cabinet on the point.

So far, it looks a lot like typical bureaucratic delay and obstruction.  The Minister of Finance didn’t respond until well after the 20 working days (and was thus in breach of the Act).  When he finally did respond it was to say that he was giving himself another month to respond

“the extension is required because your request necessitates a search through a large quantity of information and consultations are needed before a decision can be made on your request”

Frankly, it would be surprising if the Minister of Finance held very many documents at all on this issue, but time will tell.   A week earlier I had had the same postponement, and same justification, from the Treasury – and again it would be a little surprising (especially as when they asked, I made clear that I wasn’t after working level email exchanges on the issue).  Curiously, the Reserve Bank Board itself –  the people primarily responsible for appointing a Governor –  didn’t claim to have lots of documents they needed to search, only that delay was needed

because consultations necessary to make a decision on the request are such that a proper response to the request cannot reasonably be made within the original time limit.

It isn’t an urgent issue, and in substance I don’t really have much of a problem with the Spencer appointment, but it is hardly the sort of open government, or commitment to the spirit of the Official Information  Act one might wistfully, foolishly, hope for.

Reforming the Reserve Bank

A couple of weeks ago I wrote a post on where the Labour Party seemed to be going on monetary policy, informed by Alex Tarrant’s article on his conversations with Grant Robertson.  It all seemed to amount to not very much –  wording changes to make explicit an interest in the labour market (employment/unemployment), but without much reason to think it would make much difference to anything of substance.  My suggestion was that there was a distinct whiff of virtue-signalling about it.   And the sort of change Robertson seemed interested in on the governance front  –  legislating the position of in-house technocrats –  seemed unlikely to be much of a step forward at all.

Last week, had a piece on the same issues by former Herald economics editor Brian Fallow, also benefiting from an interview with Robertson.   Fallow pushes a bit harder.  His summary is that

The changes Labour proposes to make to the monetary policy framework sit somewhere between cosmetic and perilous, but closer to the former.

Cosmetic for the sorts of reasons I’ve outlined.  On the one hand, the Bank has always taken the labour market into account as one indicator of excess capacity.  And on the other hand, plenty of pieces of overseas central banking legislation refer to employment/unemployment somewhere, but there is little evidence that the central banks in those countries have run monetary policy much differently, on average over time, than the Reserve Bank of New Zealand has.

Robertson’s response is pretty underwhelming.

Asked how much difference the regime he advocates would have made, had it been in place in the past, he said, “In the very immediate past, not that much, truthfully. But there have been other times in our history, and there have been other examples around the world, when lower interest rates could have helped to reduce unemployment.”

If he was serious about this making a difference, he’d surely be able to quote chapter and verse.  When, where and how does he think it would have made a difference?

He is, however, clearly tantalised by the current situation

Even now, “Are we satisfied as a country that with 3.5% growth 5.2% unemployment is okay?”

Given that the Treasury thinks our NAIRU is nearer 4 per cent, I don’t think we should be content.  But Robertson has spent so long over the last few years defending Graeme Wheeler that he can’t quite bring himself, even now, to suggest that monetary policy could have been conducted better in the last five years, whether on the current mandate or something a little different.

If the proposed change isn’t cosmetic, Fallow worries that it could be perilous.  Why?  Because when he pushes Robertson he gets a more explicit –  and more concerning –  answer than the one Alex Tarrant got.

He has told’s Alex Tarrant that he was not going to tell the Reserve Bank whether one objective is more important than the other.

Talking to me, however, he said that ultimately the bank would remain independent. “But if unemployment starts to get out of control I would expect in that environment it says ‘At this time we are preferencing that and we are going to lower rates by a greater percentage than we might have’.”

In the event of a stagflation scenario he would expect it to focus more on the falling output and employment side of the dilemma and to ease.

“I think the setting of a clear direction here is what is important.”

In short Robertson seems to be saying that if Parliament were to change the statute, the message to the bank would be when in doubt err on the side of stimulus.

If unemployment is prioritised by the Reserve Bank in such circumstances, it is a recipe for inflation getting away.  In the medium-term, monetary policy can really only affect nominal variables (inflation, price level, nominal GDP or whatever), it simply can’t affect real variables.  Using monetary policy to pursue such goals directly is a risky prescription.  I wouldn’t want to overstate the issue –  New Zealand isn’t heading for hyperinflation – but part of reason we and other countries ended up with persistently high inflation in the 1970s is that too much weight was placed on unemployment in setting monetary policy.  Getting inflation back down again was costly –  including in terms of increased unemployment.  On a smaller scale, as Fallow highlights, the desire to “give growth a chance” was part of what was behind the monetary policy misjudgements of 2003 to 2006, when monetary policy wasn’t tight enough.

Robertson’s words suggest he still hasn’t thought the issues through very deeply or carefully.  For now, I’m sticking with the “cosmetic” or virtue-signalling interpretation of what Labour is on about.   And I’m still uncomfortable at the lack of command of the issues and experience in someone who aspires to be Minister of Finance later this year.

But yesterday, a mainstream economist came out in support of more or less the direction Robertson is proposing.  In his youth Peter Redward spent a few years at the Reserve Bank, and then spent time in various roles, including at Barclays and Deutsche Bank, before returning to New Zealand and establishing his own economic and financial markets advisory firm.  He focuses on emerging Asian foreign exchange markets, but keeps a keen eye on monetary policy developments in New Zealand.

In his short piece at Newsroom, Peter Redward says It’s time for a Reserve Bank change.  He notes of the last few years that

Whether Governor Wheeler consciously aimed for a hawkish interpretation of the Act, or not, we may never know. But hawkish he’s been, leading to tighter monetary conditions than were necessary, boosting the New Zealand dollar and confining thousands of New Zealanders to needless unemployment.

And argues that

…maybe it’s time to adopt a dual mandate in the Act. One possibility is the dual mandate of the U.S. Federal Reserve. The Federal Reserve has a two percent inflation target but it also targets ‘maximum employment’. Economists have differing interpretations of ‘maximum employment’ so it acts as a constraint, and that’s the point.

While no one knows exactly where ‘maximum employment’ in New Zealand is, I believe most economists would agree that it’s likely to be consistent with an unemployment rate somewhere around 4.5 percent (give or take 0.25 percent). If the Reserve Bank had a dual mandate, its elevated level would have acted to constrain the bank’s aborted tightening of policy in 2009 and 2014.

I’m very sympathetic to his critique of Graeme Wheeler’s stewardship of monetary policy, and highlighted in numerous of my own commentaries, after it became apparent that the 2014 OCR increases had been an unnecessary mistake, the Governor’s apparent indifference to an unemployment rate that remained well above any estimates of a NAIRU.

But I remain a bit more sceptical than Peter appears to be about how much difference a re-specified mandate might have made.  As I’ve argued before, past Reserve Bank research suggests that faced with the sorts of shocks New Zealand experienced, policymakers at the Fed, the RBA and the Bank of Canada would have responded much the same way as the Reserve Bank of New Zealand did.  That work was done for periods prior to 2008/09 –  for most of the time since then the Fed was at or very near the lower bound on interest rates, so the game was a bit different –  but it isn’t clear that the specification of the target has been the problem in New Zealand in the last few years.  After all, simply on inflation grounds alone the Reserve Bank hasn’t done well.

Here is a chart of the Reserve Bank’s unemployment rate projections from the March 2014 MPS, the occasion when they started raising the OCR.

2014 U projections.png

The second observation is the last actual data they had –  the unemployment rate for the December 2013 quarter.  So when they started the tightening cycle they thought the unemployment would be falling quite considerably that year, before levelling out around what they thought of as something near what they must have thought of as the practical NAIRU  (this was before last year’s revisions to the HLFS which lowered unemployment rates, and NAIRU estimates, for the last few years).    The problem then wasn’t that they didn’t care about unemployment, it is that they got their forecasts –  particular as regards inflation –  badly wrong.  It isn’t clear why a different target specification would have altered the policy judgement at the time.

Perhaps it would have done so once it became apparent that the OCR increases hadn’t really been necessary, but a stubborn refusal by the Governor to concede mistakes, even with hindsight, plus a mindset firmly focused on how “extraordinarily stimulatory” monetary policy allegedly was –  when no one had any real idea what a neutral interest rate might be in the current environment, and when inflation stubbornly didn’t rise much if at all –  seem more likely explanations.    The Bank kept forecasting that inflation would rise and unemployment would fall –  the jointly desired outcomes.

(And if one looks at the Bank’s forecasts in mid 2010, when they made the previous unnecessary start on tightening, one gets much the same picture –  forecasts of falling unemployment and rising inflation, that simply didn’t happen.)

So why should we supposed that a different specification of the target would have made much difference to how policy was set?  We had an institution that was misreading things, in a political climate where no one seemed much bothered by the unemployment rate holding up, and where for a long time financial markets endorsed the approach taken by the Reserve Bank (often more enthusiastic for future tightenings than even the Governor and his advisers were).   Getting something closer to the right model of the world (for the times), and quickly learning from one’s mis-steps, seem likely to matter more than the words of the Act in this area.

As I’ve said repeatedly here, I’m not firmly opposed to amending the relevant clauses of the Reserve Bank Act to mention the desirability of things like a low unemployment rate.  But even the Federal Reserve Act makes clear that good monetary policy focused on a nominal target creates a climate consistent with high employment.  High employment isn’t a goal for the Federal Reserve is supposed to pursue directly, even if –  all else equal –  a high unemployment rate relative to an (uncertain) NAIRU is a useful indicator that something might be wrong with monetary policy settings. It isn’t clear there is anything much to gain from such amendments –  or that they are where the real issues regarding the Reserve Bank are – but sometimes perhaps virtue needs to be signalled?    My own concrete suggestion in this area would be to require the Reserve Bank to publish, every six months, its own estimates of the NAIRU and to explain the reasons for the deviations of actual unemployment from the NAIRU, how quickly that gap could be expected to close, and the contribution of monetary policy to the evolution of the gap.

Brian Fallow’s article suggested that Labour still hasn’t settled on how to reform the governance of the Reserve Bank.

Robertson is non-committal at this stage on the composition of a monetary policy committee to take interest rate decisions, including to what extent it should include members from outside the bank.

Peter Redward has a more specific proposal for him.

What’s needed is a formal Monetary Board complete with published minutes and, released after a grace period, transcripts of the meeting and the voting record of members. In a recent speech, U.S. Federal Reserve Vice Chair, Stanley Fischer, argued that this arrangement is superior to the sole responsibility model in achieving outcomes and accountability. Changes to the role and responsibility of the Governor will necessitate changes to the structure of the Reserve Bank Board. Best practice would suggest that a Monetary Board should be created to set monetary policy with the Reserve Bank Board selecting candidates for the committee while maintaining oversight of the bank. To ensure that external board members are not simply captured by the bank it may be necessary to provide a secretariat similar to the Fonterra Shareholder’s Council, operated at arms-length from bank management.

It isn’t my favoured model, but it would be a considerable step in the right direction, and far superior – in terms of heightened accountability and good governance of a powerful government agency –  to Graeme Wheeler’s preference to legislate his own internal committee.  The biggest problem I see with the Redward proposal, is that it has too much of a democratic deficit.  Monetary policy decisionmakers shouldn’t be appointed by other unelected people –  the Reserve Bank Board –  but by people (the Minister of Finance and his Cabinet colleagues) whom we the voters can toss out. That is how it is pretty much everywhere else.

Peter’s proposal focuses on monetary policy.  But, of course, the Reserve Bank has much wider policy responsibilities, including a lot of discretionary power –  not constrained by anything like the PTA –  in the area of financial regulation.  I presume he would also favour committee decisionmaking for those functions.  I’ve proposed two committees –  a Monetary Policy Committee and a Prudential Policy Committee, each appointed by the Minister of Finance, with a majority of non-executive members, and with each member subject to parliamentary confirmation hearings (although not parliamentary veto).  It is a very similar model to that put in place in the United Kingdom in the last few years.  It puts much less reliance on one person –  who will sometimes be exceptional, and occasionally really bad, but on average will be about average –  and would be more in step with the way in which other countries govern these sorts of functions, and with the way we govern other New Zealand public sector agencies.  I hope the Labour Party is giving serious thought to these sorts of options, and while the headline interest is often in monetary policy, the governance of the financial regulatory powers is at least as important to get right.

And then of course, getting a good Governor will always matter a lot.  The Governor, as chief executive, will set the tone within the organisation, and determine what behaviours are rewarded and which are frowned on or penalised.  If the Reserve Bank failed over the last few years, it wasn’t just because Graeme Wheeler was the sole monetary policy decisionmaker –  his advisers mostly seemed to agree with him –  but because of the sort of organisation he fostered, where “getting with the agenda” seemed more important and more valued than dissent or challenge, in area where few people know anything much with a very high degree of confidence.    Character and judgement are probably, at the margin, more important than high level technical expertise.

And while people are thinking about reforms to the Reserve Bank Act don’t lose sight of how little accountability and control there is over the Reserve Bank’s use of public money, or about the provisions it has carved out for itself from the Official Information Act which allow it to keep secret submissions on major policy proposals even –  perhaps even especially –  when they come from parties who would be affected by those proposals.

Revising the Reserve Bank Act was the first legislative priority for the first Labour government that took office in 1935.    I’m not suggesting the same priority if there is a new Labour-led government later in the year, but there is a real and substantial agenda of reforms to address, which will take time to get right, and which take on some added urgency in view of the vacancy in the office of the Governor that needs to be filled by next March.   That appointment –  a key step in the reform and revitalisation of the Reserve Bank –  should be led by whoever is Minister of Finance, not by the faceless (and unaccountable) men and women of the Reserve Bank’s Board, the people who have presided complacently over the mis-steps of the last few years.




Getting the small things right

Readers may be getting bored with a full week of posts on nothing other than Reserve Bank topics.  In truth, so am I.    But here is one last post in the sequence.

Saturday’s Herald featured, as the front page of the business section, an interview with outgoing Reserve Bank Governor Graeme Wheeler.    This seems to have become a bit of a pattern –  the Herald gets access to the Governor the day after the MPS, to provide a bit of a platform for whatever the Governor wants to say.  The interviews are notable for being about as searching and rigorous as, say, the recent Women’s Weekly profile of Bill and Mary English.

The interview allowed the outgoing Governor to “launch the campaign” to become Governor for his deputy (and former Government Statistician), Geoff Bascand.    That shouldn’t surprise anyone.  Then again, it has now been 35 years since an internal candidate was appointed Governor.  Successful organisations – the Reserve Bank of Australia is one example –  are often seen promoting from within.

But my interest in the interview mostly centred on the Governor’s claim that “the economy is in very good shape”, and that we really should be grateful to the Reserve Bank for being a “big part of that outcome”.    I had to read it several times to be sure I wasn’t missing something.   Here was the full excerpt:

Broadly, if you look at where New Zealand is now “in terms of growth, inflation, unemployment rate, current account as a share of GDP, labour force participation and compare all that with a 20 or 30 year average, then the economy is a very good shape”, he says.

“It is puzzling to me why some of the commentators been so critical when the Reserve Bank is a big part of that outcome. We aren’t the whole story by any means, but our monetary policy configurations do have a major impact on the economy.”

In the initial version I read online on Saturday, and in the hard copy newspaper, that “compare all that with a 20 or 30 year average” read “compare all that with a 2009 year average”.    Quite which of them the Governor actually said, or intended to say, isn’t clear.  But either way, it isn’t very convincing.  2009 was the depth of the recession: economies tend to recover from recessions.  Pretty much every economy in the world –  perhaps with the exception of Greece –  has done so to a greater or lesser extent.  It is no great achievement to cut interest rates a lot in a recession.

But lets grant that the Governor meant to refer to comparisons with a 20 to 30 year average (I’ve seen him make such comparisons previously).  How then do his claims stack up?  He lists several indicators to focus on. Of them

  • Per capita growth –  the only sort of growth that really matters –  has been pretty weak this cycle compared to that in previous recoveries and growth phases,real-gdp-pc-aapc
  • Inflation is (of course) low, but then it is supposed to be higher.  The target is centred on 2 per cent –  a rate we haven’t seen for several years –  and was previously centred on 1 per cent, and then 1.5 per cent.  Trend inflation outcomes are the responsibility of the Reserve Bank, but those outcomes have been away from target for some time.
  • The unemployment rate is below a 20 or 30 year average –  although well above the average prior to the mid 1980s –  but then all estimates (including the Bank’s) are that the NAIRU has been falling over that time, and no one claims that that has been because of monetary policy (any more than previous increases were).
  • The current account deficit is certainly smaller than it has been.  But that is mostly because interest rates have been so much lower than had been expected (s0 that the servicing costs of the large stock of external debt have been surprisingly low).  Much of the time, the Governor is more inclined to lament, than to celebrate, just how low interest rates have been, here and abroad.
  • Labour force participation is higher than the historical average, but it isn’t clear why this is unambiguously a good thing.    Work is a cost to individuals as well, at times, a source of satisfaction, but mostly people work to live.  In a subsistence economy, pretty much 100 per cent of adults work.  When New Zealand had the highest per capita incomes in the world, participation rates were lower.

But, of course, even then the Governor has cherrypicked his data.    There isn’t even any mention in this list of disastrously high house prices, or of the household debt stock, let alone of the real exchange rate, or the productivity growth performance, or the weak performance of the tradables sector, or of the large gaps between New Zealand incomes/productivity and those in most other advanced countries.

You might think that those are simply “Reddell hobbyhorse” indicators.   But we know the Governor cares a lot about house prices and household debt, and about the real exchange rate.  And it isn’t that long –  before he became embattled, and seemed to feel the need to become something of an apologist for New Zealand’s economic performance –  since he was talking about exactly the same sort of stuff.

Just a few weeks after he became Governor, he gave a speech in Auckland on Central banking in a post-crisis world . In the opening paragraphs of that speech he counselled

With these assets we should be capable of stronger economic growth. Internationally, and particularly in smaller economies, economic growth is driven by the private sector and its ability to compete on global markets. We need to reverse the slowdown in multifactor productivity growth since 2005 and the decline in value added in our tradables sector. And we need to reverse the shift of resources into the public sector and other non-traded activities.

Productivity growth hasn’t improved –  if anything the reverse – since then, exports as a share of GDP have been slipping, and there has been no sustained rebalancing towards the tradables sector.


They were the Governor’s words, not mine.

Another couple of months into his term, he gave another interesting speech, this time Improving New Zealand’s Economic Growth.   Back then he seemed concerned about productivity (and the lack of it)

Since 1990 we’ve outperformed many OECD countries on inflation and unemployment. Our inflation rate has been one and a quarter percent below the OECD median and our unemployment rate half a percent lower. But our per capita income has lagged behind and we’ve run large current account deficits. Real per capita GDP growth has been one and a quarter percent, about half a percent below the median and our current account deficit has averaged five percent of GDP – about the 6th largest relative to GDP in the OECD region.

There are two main ways in which our prosperity can improve over the longer run. The first is if the world is willing to pay more for what we produce. The second is by raising our labour productivity – that is by increasing the level of output per working hour. In the short term, we can generate higher income if we increase labour force participation or work longer hours. But we already have a higher proportion of our population in the labour force than nearly all other OECD economies and we work longer hours than most people in the OECD.


This is striking given the high international rankings for the quality of our institutions, control of corruption, ease of doing business, and according to the World Bank, the highest per capita endowment of renewable resources in the world.

Chart 2: Labour productivity growth in selected OECD economies, 1990-2011

(Average annual rate)


Source: OECD

So why is our per capita income so far below the OECD median? Partly it’s due to our geographic location and small economic size. Distance and economic size matter a lot even in a more globalised world of trade, capital and knowledge flows, and increasing interdependence. This also partly explains why our export range is concentrated over relatively few products – with food and beverages accounting for almost half our exports. The OECD and IMF believe size and distance, which limit economies of scale and market opportunities, account for around three quarters of the gap in our per capita income compared to the OECD average.

But this is not the whole story. Despite our high international rankings in key areas, the latest World Economic Forum’s Global Competitiveness Report ranks New Zealand’s overall competitiveness at 25th out of 142 countries. Besides market size, we perform poorly on our macroeconomic environment, and especially on our budget deficit and low national savings. But regulatory and performance-related factors also diminish our growth potential. Many of the remedies to substantially improve our ranking lie in our own hands, and groups such as the 2025 task force, the Savings Working Group, and the Productivity Commission, emphasised reforms that can raise our living standards.

He thought then there were three areas governments should focus on

Three areas seem particularly important. The first, is to raise our level of saving and investment, and improve the quality and productivity of our investment.

The other two were to close fiscal deficits, and to lift human capital. On the latter he observed

The bottom income deciles are populated by those with lesser skills, and those who experience prolonged and recurrent spells of unemployment. Addressing these groups would both promote productivity and reduce inequality.

Very little has changed since the Governor gave those speeches early in his term.  The fiscal deficit has been closed, and no doubt the Governor would welcome that.  But in late 2012 and 2013, there was just no sign that he thought the economy was in “very good shape” –  rather it had key pretty deeply embedded structural challenges – and few of the key indicators he cited have changed for the better since then.

Now, to be clear, (and as central bank governors have pointed out for decades) very little of this is down to the Reserve Bank.  Central banks aren’t responsible for  –  and don’t have much influence on trends in –  house prices, current account deficits, productivity growth (labour or multi-factor), the health of the tradables sector, savings rates, participation rates or NAIRUs, let alone human capital and inequality.  So the fact that the economy isn’t in particularly “good shape” –  even if it isn’t doing that badly on some purely cyclical measures – isn’t the Governor’s fault, or that of the Reserve Bank.  What the G0vernor can do is keep inflation close to target, and help safeguard the soundness of the financial system.

Which makes that line of the Governor’s, from Saturday interview, so puzzling

“It is puzzling to me why some of the commentators been so critical when the Reserve Bank is a big part of that outcome. We aren’t the whole story by any means, but our monetary policy configurations do have a major impact on the economy.”

After all, since 2009, the Reserve Bank has twice started tightening monetary policy only to have to reverse itself.  I’m not today getting into the question of how much of that was a foreseeable problem.  Even if none of it was, the fact remained that the Bank twice (out of two times) had to reverse itself.    Neither episode –  tightening and then reversal –  had the sort of major positive impact on the economy that the Governor talks of.  At best, they probably did little damage.  And those episodes aside, the Reserve Bank just hasn’t done much on monetary policy for years.   People –  like me –  have been critical of the Reserve Bank’s monetary policy management because of (a) those reversals, (b) the refusal to even acknowledge mistakes, (c) more recently, almost laughable attempts to rewrite history to suggest they were easing when in fact they were tightening.  And, of course, the persistent deviation of inflation from target, and the concomitant extent to which the unemployment rate has been kept unnecessarily higher than required, or than the Bank’s own estimate would have suggested.  Those outcomes suggested that, on average, monetary policy has been a bit too tight, as well as unnecessarily variable.

Is the aggregate cyclical position of the economy terribly bad?  No, it isn’t.  But it isn’t great either, and the longer-term metrics give even less reason for an upbeat story.  The Graeme Wheeler who took up the job of Governor in late 2012 was better than this.  Back then, he was willing to highlight what he saw as some of the structural problems.  Perhaps it wasn’t his job –  central bank governors don’t need to get into that territory, but he chose to.   If he ventures into such territory, what we should expect is a Governor who calls things straight –  for whom black doesn’t become white just because the Governor himself has himself had a rough few years.  If he no longer feels he can name the serious economic challenges New Zealand still faces, perhaps he’d have been better to keep quiet rather than further undermine his good name with the sort of propaganda that we shouldn’t hope for, but might nonetheless expect, from a political party or lobby group.

Why do I bother, you might wonder?  I was reading this morning a brief piece written to mark the anniversary of the death of  US Supreme Court justice Antonin Scalia, by one of his former law clerks.   The author wrote about “five lessons for living well” that he had seen in the judge’s life.  One of them was

“Be honest in the small things, even if it makes life more difficult”

If our democracy and institutions are to be strong, it is what we should expect from people in powerful public office.    It is too easy to put out “propaganda” and for it to slide past, and for people to nod in acquiescence when they read stuff they don’t know a lot about.  At one level, Graeme Wheeler’s interview doesn’t matter much –  and he’ll be off to pastures new shortly –  but we deserve better, from our journalists and (in particular) from those who seek out and voluntarily assume high public office.

Reserve Bank Governor and governance: some considerations

Since the announcement last week that the Reserve Bank Governor is leaving at the end of his term, and that his senior deputy won’t be a candidate to replace him, there has been a lot of commentary around both about what the Board and the (post-election) Minister of Finance should be looking for in a Governor, and what changes might be made in the legislative arrangements under which the Reserve Bank operates.  As just one example, both the centre-left economics columnists in yesterday’s Sunday Star Times were writing about aspects of the topic.

That seems entirely appropriate.  The Reserve Bank exercises huge discretionary power in both monetary policy and financial regulation, and the once-vaunted accountability mechanisms have actually turned out to be quite weak.  And the basic structure of the legislation the Bank operates under is now getting on for 30 years old.   Much has changed in that time.

Finding the right individual for the job of Governor matters a lot.  Even within the limitations of the current legislation, the right individual (building the right new senior management team) can make a material difference, in revitalising the organisation, and putting it on a more open and transparent footing –  both as regards policy, and the conduct of the Bank’s own affairs.    Still, we should be careful of what we wish for.  The Herald’s editorial last Friday argued, writing about the monetary policy responsibilties, that “the next Governor will need to be bold”.  Well, perhaps.  But “boldness” isn’t a great quality unless one is sure (a) of to what end it is directed, and (b) of the judgement, capability and character of the person being bold.  If I think back over 30 years of New Zealand monetary policy, Alan Bollard’s deep cuts in the OCR in the crisis conditions of late 2008 probably qualify as bold.  But so did Don Brash’s MCI experiment and Graeme Wheeler’s 2014 tightening cycle.  Neither of those ended well.

In the Sunday Star Times, Rod Oram argued

So, the best we can hope for is the next government, regardless of which party leads it, has the courage to recruit a rare individual as the next Reserve Bank Governor – a person who is highly experienced in the intricacies of the job, yet insightful and brave enough to restore the institution to world leadership.

That last line or so seemed both unrealistic and somewhat ahistorical –  perhaps partly because Oram appears to have come to New Zealand only as the Reserve Bank’s “glory days” were already passing.

The Reserve Bank of New Zealand gets credit for being the first country in the world to introduce (modern) inflation targeting.  I was present at the creation, and am proud of having been part of that.  But it was at least as much accident as design   –  a Treasury that was determined we had to have a contractural arrangement (pretty much every other government agency was getting one), and a muddied post-liberalisation post financial crisis world in which nothing much else would work.  We weren’t forerunners in central bank independence, in getting on top of inflation, in the idea of announcing medium-term targets, or in the publication of accountability documents.  And most of the specific details of our model haven’t been followed when other countries came to revise their legislation.  And if you read our economic analysis during the late 1980s and 1990s it was mixed bag, to say the least.  If I recall with pride the day I read Samuel Brittan of the FT praise our second-ever Monetary Policy Statement, which I’d largely rewritten over a weekend after Saddam Hussein invaded Kuwait and oil prices rocketed, I read some of other stuff we (I) wrote and cringe at least a little.  We were doing some good stuff, but were rushing to catch up with what being a modern central bank really involved, and there were so little institutional resilience that we stumbled into the MCI debacle only a few years later.  (For those too young to understand the reference, (a) be thankful, and (b) I will do a proper post about it one day.)

And what of banking regulation?  After an extensive and acrimonious internal debate in the early 1990s, the Reserve Bank did change quite materially its approach to banking supervision and regulation.  Pulling back from the seemingly-inexorable pressures to become ever more intrusive and interventionist in our banking supervision, we adopted a model which emphasised director-responsibility, and public disclosure, with the aim of better aligning incentives, to strengthen market discipline and reduce the prospect of public bail-outs etc.  Capital requirements were left in place, but as much because the banks wanted them –  they feared they look “unregulated” without them – as because of any Reserve Bank preference.  I wasn’t that closely involved, but I mostly thought it was a step in the right direction –  and lament the way that the Reserve Bank has wound back on public disclosure requirements in recent years.   But if there were elements of the model that did, in small ways, influence the thinking and practice of other countries’ regulatory models, they weren’t very important.  It was innovative, and may even have been right, but it wasn’t really tested –  as the key institutions of our banking system became increasingly Australian-dominated (and hence under the overall oversight of Australian regulatory authorities).  And it hasn’t become the global model – bailouts abounded in 2008/09, no one thinks that problem has been solved, supervision and regulation is at least as intrusive and second-guessing as ever, and the Reserve Bank’s resistance to deposit insurance now looks more anomalous than ever.    There was some good and interesting stuff done, and some able people were involved in doing it, but it was never the basis of “world leadership”.

In any case, how realistic is the idea of “world leadership” in this area?  We are a small country, we don’t resource our central bank that generously (and I don’t think we should spend more), and central banking feels like one of those areas (risk management, crisis management etc) where one should be wary of the pathbreaking – after all, how do we distinguish it from what turns out to be a dead end?; isn’t this what we have academics and think-tanks for etc?  And realistically, if one looks through the lists of people talked about as potential candidates as Governor, be it Geoff Bascand or Adrian Orr (probably the names at the top of most lists) or others –  Rod Carr, John McDermott, Murray Sherwin, David Archer, Arthur Grimes, New Zealanders running economic advisory firms, New Zealanders who are past or present bank CEOs here or abroad etc –  very few look as though they have even the glimmerings of what Oram seems to be looking for.   And even those who just might, have other weaknesses.  For me, I’d settle for someone with the character, energy and judgement, backed up a solid underpinning of professional expertise, to revitalise the institution, rebuild confidence in it, and provide a steady hand on the policy levers, backed by high quality analysis and an openness to alternative perspectives, through both the mundane periods and the (hopefully rare) crises.  And all that combined with a fit sense of the limitations of what monetary policy and banking regulation/supervision can and should do (on which point, I’ll come back another day to Shamubeel Eaqub’s column – not apparently online – on what he thinks the Bank and the new Governor should be doing.)

Finding the right person is a challenge, but it is also highly desirable to take the opportunity now to think about the legislation under which the Bank operates –  in particular, the governance provisions.    Ours is quite an unusual model, whether one looks across other central banks and financial regulatory agencies, or across other New Zealand public sector institutions.  Under our law, all the extensive discretionary powers of the institution are vested in one individual –  him or herself unelected, and selected primarily by unelected people (the Board) –  and the range of powers the institution itself exercises is itself unusually wide.     And, as I’ve noted previously, there is no statutory requirement for the Reserve Bank to have, or publish, a budget, let alone anything of its medium-term financial plans, even though financial control of public spending is one of the cornerstones of democracy. Parliament has less control over the Reserve Bank’s spending than over that of, say, the SIS.       And the Reserve Bank takes an approach to the Official Information Act that suggests they still see themselves as somehow “different” and above the normal standards –  for them, transparency and accountability are about them telling us what they want us to see, not about citizens’ access to information and analysis generated at public expense.

So I was pleased to see the Dominion-Post’s editorial this morning, Good time to reform Bank.   In making their case, they quote me

“In New Zealand public life, it is difficult to think of any other position in which the holder wields as much individual power, without practical possibility of appeal,” Reddell has argued.

Joyce should also look to make the bank more transparent. It publicly releases official accounts of its forecasts and analysis reasonably regularly, but it seldom reveals anything of how its debates are conducted behind closed doors.

Again, this is not the case internationally. The US Federal Reserve releases the minutes of its regular meetings three weeks after they happen. New Zealand likes to brag about its open approach to official information, but in this sphere as in others, it has fallen behind the pack.

As they note, there has been reasonably widespread support for reform.  They note support from The Treasury, and from the Green Party (a recent post from James Shaw reaffirmed that support).  And when the Treasury looked at the issue a few years ago (before the Wheeler appointment), they found that most market economists also supported change.  The Labour Party has toyed with favouring change, and when the previous Labour government commissioned an inquiry 15 years ago, their reviewer Professor Lars Svensson also recommended change.     And we know that Graeme Wheeler himself favoured change –  he made the point again in the (rather soft) interview in Saturday’s Herald.

When Bill English was Minister of Finance, the government wasn’t willing to countenance change.  Having let the chance slip before Wheeler was appointed, going with any model other than Wheeler’s favourite one (legislate to give him and his deputies all the power) over the last few years, would probably have been a political negative for English.  And the Wheeler option is an unsatisfactory one on a number of counts –  since the Governor appoints and remunerates his deputies and assistant, it isn’t much protection against poor decisionmaking or a bad Governor.  But now the slate is clear: the Governor is moving on to new opportunities, and his deputy will simply be holding the fort for six months.   A decision now to think hard about reforming the governance model isn’t a reflection on the current Governor (not that Lars Svensson saw his recommendation in 2001 as being so either), and provides an opportunity for the government to provide a steer to the Board about what sort of Reserve Bank they want the new Governor to run.  It is unlikely new legislation could be put in place by next March (when Grant Spencer’s acting term runs out), but a new Governor could be appointed on the expectation that that person will lead the transition to a new, more modern and internationally comparable, governance model for the Bank.

Who knows if the new Minister of Finance is interested, but flicking through some old posts, I was encouraged to find one from September 2015, reporting an exchange in the House between then Associate Minister of Finance Steven Joyce and the Greens then finance spokesperson Julie Anne Genter.  In response to a question on governance, Joyce responded

Hon STEVEN JOYCE : The suggestion that the member makes, of having a panel of people making the decision, is, I have to say, not the silliest suggestion in monetary policy we have heard from the Greens over the years, and many countries—

A backhanded dig at the Greens at one level, but not an outright dismissal by any means.

Commissioning a background piece of analysis from, say, the Reserve Bank and Treasury, to review carefully, and neutrally, the issues and options, to be delivered to the Minister at the end of September, after Wheeler has left and the election is over, would be an appropriate step now.  Such a document –  which could later form the basis for a public consultative document –  would be a useful contribution to advancing the issue, and a resource that would enable any incoming government to work through the issues and analysis relatively quickly  –  consistent with the sort of timeframe relevant to the appointment of a new Governor.

Reform in this area is something I’ve championed for a long time, both inside and outside the Bank.  It isn’t primarily a matter for the Bank –  it is about how Parliament and the executive want a powerful public agency to be structured and governed –  although of course the Bank may have some specific insights on some of the relevant technical details (of which there are many –  reform in this area isn’t the stuff of some two page bill).

I’ve laid out my own arguments for reform more fully in past posts (eg here) and a discussion document of my own.

Making the case for change is, I think, relatively easy.      There is a much wider range of potential alternative models.   At one end, one could leave most other things intact, and simply shift the power from the Governor to a committee of him and his deputies/assistants.  At the other, one could perhaps break-up the Bank, creating a separate financial regulatory agency (paralleling the Australian approach) with separate governance structures for the Bank and the new successor institution.

I don’t have a strong view on whether the regulatory functions should be kept in the same institution as monetary policy –  there is a variety of models internationally.  But if the functions are kept in a single institution, I think there is a pretty strong case for separate governing bodies for each of the main functions –  both because different sets of expertise are required, but also to help manage the tensions and conflicts and strengthen accountability for the exercise of the various different parts of the Act(s).    This post covers some of that ground.   The key features of the governance model I propose would be:

  • The Reserve Bank Board would be reformed to become more like a corporate (or Crown entity) Board, with responsibility for all aspects of the Reserve Bank other than those explicitly assigned to others (NZClear, foreign reserves management, currency, and the overall resourcing and performance of the institution).
  •  Two policy committees would be established: a Monetary Policy Committee and a Prudential Policy Committee each responsible for those policy decisions in these two areas that are currently the (final) responsibility of the Governor.  Thus, the Monetary Policy Committee would be responsible for OCR decisions, for Monetary Policy Statements, for negotiating a PTA with the Minister, and for the foreign exchange intervention framework.  The Prudential Policy Committee would be responsible for all prudential matters, including so-called macro-prudential policy, affecting banks, non-bank deposit takers and insurance companies.  The PPC would also be responsible for Financial Stability Reports.
  •  Committees should be kept to a moderate size, and should comprise the Governor, a Deputy Governor, and between three and five others (non staff), all of whom (ie including the Governors)  would be appointed by the Minister of Finance and subject to scrutiny hearings before Parliament’s Finance and Expenditure Committee.  There should be no presumption in the amended legislation that the appointees would be “expert” –  however that would be defined – although it might be reasonable to expect that at least one person with strong subject expertise would be appointed to each committee.
  •  The Secretary to the Treasury, or his/her nominee, would be a non-voting member of each committee (the case is probably particularly strong for the Prudential Policy Committee).

In addition, the legislation should be amended to provide for the publication of (substantive) minutes of the meetings of these bodies (with suitable lags), and to require stronger parliamentary control, and public scrutiny, over the Bank’s spending plans.

It isn’t, of course, the only possible answer, but of those on offer I think it provides the best balance among the various considerations: providing internal expertise and external perspectives, clear lines of accountability for diverse functions, greater transparency and financial accountability, coordination across functions and arms of government, all while providing a significant role for the Governor as chief executive, and linch-pin, of the organisation, without anything like as dominant a personal policy role as there has been until now.

We won’t find –  and probably shouldn’t be seeking –  a Governor who walks on water.  But an able person who would effectively lead a revitalised Bank into a new era, with this sort of governance structure, would be making a very substantial contribution.  Change management skills and a commitment to organisation-building should be at least as important as personal technical expertise.  I hope that is the sort of person, and the sort of structure, that the post-election Minister of Finance, and the Board, end up looking for.




The new tightening cycle?

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

This chart shows the Reserve Bank’s projected future OCR tracks from last November’s MPS and the track from yesterday’s MPS.


Using the definition of an “easing cycle” they appear to have adopted yesterday, to try to provide some cover for their 2014 misjudgements, this must surely mark the beginning of a new “tightening cycle”?     And, yes, the forward track was revised up very slightly.  Given that the Bank usually moves in increments of 25 basis points, the first actual OCR increase is currently expected in 2020 (this is the first time we’ve had projections for 2020).

But, of course, you didn’t hear the words “tightening cycle” from the Governor, or his offsiders, to describe what they’d done yesterday.  (I missed the start of the press conference, but I’ve seen no references anywhere to the words, or ideas).  And that is because it wasn’t the start of a “tightening cycle”.  Indeed, if one takes the projections seriously, one must assume there is about as much chance of another OCR cut in the next year to two, as of an increase.

And the Bank’s own official words back up the idea that this wasn’t the start of a tightening cycle.  Here are the key final sentences from the press release for the November MPS when, you’ll recall, they cut the OCR.

Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that policy settings, including today’s easing, will see growth strong enough to have inflation settle near the middle of the target range. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.

and here are the sentences from yesterday’s statement.

Inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.

Parse it as you will, in substance those statements are all but identical.  If one wanted to be picky, one could highlight the addition of the words “for a considerable period” –  but it was probably aimed at those market participants who the Bank thinks (rightly in my view) have got a bit ahead of themselves in their enthusiasm for OCR increases later this year.

It would simply be nonsensical to claim that yesterday’s MPS was the start of a “tightening cycle”. It clearly wasn’t.  The Bank didn’t present it that way, and neither markets nor media have interpreted in that way.

It was even more nonsensical for them now to attempt to rewrite history and suggest that they began an easing cycle in June 2014.  They didn’t, they didn’t think that was what they were doing at the time, no one else did then (here, for example, was one of Wheeler’s bigger fans’ own quick assessment at the time) , and no one else does now.  They should be embarrassed.

Perhaps some readers will think I’ve made too much of the point.  But Parliament has given a great deal of power to the Governor, who has openly argued that the Bank is highly accountable.  One of the vehicles for that accountability –  a statutory vehicle –  is the Monetary Policy Statement.   Reasonable people can and do differ over the conduct of policy in 2014, and it is healthy to have the debate –  human beings learn from considered reflection and examination.    But attempting to twist language to try to rewrite the historical memory isn’t the sort of thing we should be expect from public servants who wield so much power.   And while Wheeler himself will soon be history, he has been keen to argue that he governs collegially –  emphasising the role of his deputies and the assistant governor.  Of them, the deputy chief executive will succeed Wheeler as Governor for six months, and most lists of potential candidates for the next permanent Governor seem to include both the other deputy governor, Geoff Bascand, and the assistant governor John McDermott.  The Governor signs the MPS, but McDermott’s department generates the document –  text and supporting analysis.   An excellent central bank –  doing policy well, producing strong supporting research and analysis, being open and accountable (rather than just playing political games), should be doing a lot better than this.

I was also struck by another of the Bank’s attempts in yesterday’s MPS to smooth over its record.  They noted in chapter 2 that

“Annual CPI inflation has averaged 2.1 per cent since the current target range was introduced in 2002”.

Which is true, but not particularly revealing.    For a start, during the Bollard decade, it averaged 2.5 per cent (excluding the direct effects of the higher GST) and in the Wheeler years it has averaged so far 0.8 per cent.  Lags mean Brash (and the old target) was responsible for the first year or so of the Bollard results, and Bollard was responsible for the first year or so of the Wheeler results, so here is a chart showing a three-year moving average of annual CPI inflation (again ex GST).  I’ve started from September 2005, so that all the data cover periods when the inflation target midpoint was 2 per cent.


It isn’t exactly a record of keeping inflation near the midpoint, even on average.  If the Bank seriously wants to argue that its performance should be evaluated over 15 year periods, they should abandon any pretence that there is serious accountability embedded in the system. Or, they could just play it straight, recognise their own (inevitable) limitations, and participate in some thoughtful, rather than propagandistic, reflections on the past conduct of policy and lessons for the future.  We should be wanting –  the Minister and Board should be seeking –  a Governor who has that sort of open-minded self-confidence.

When I exchange notes with other former Reserve Bank people one common line that comes up is a sense that the analysis in the Bank’s Monetary Policy Statements is often rather tired, and adds little of value to the reader.    Someone went as far yesterday as to send me a 20 year old MPS as a standard for comparison.  I often caution people that each generation is prone to view their successors that way, and insert the caveat that I hesitate to claim much for a period in which the Reserve Bank had the MCI (and a key senior manager, who fortunately didn’t last long, who often nodded off, just across the table from the Governor, in Monetary Policy Committee meetings).  Nonetheless, I can’t help coming to the same conclusion myself.    There are defences –  for a small central bank, four full MPSs a year is probably too many –  simply cranking the handle to churn out the documents take a lot of resource.  But it is the Bank that chooses that model –  Parliament only requires two statutory MPSs a year.  It could be argued also too that most of the value in the document is in the one page press release and a single table  –  but then why produce 30 to 40 pages?   And sadly, even when they do try to introduce new material, I often don’t find it very persuasive or enlightening.  And sometimes, the emphases seem quite politically convenient –  productivity, for example, (or the complete lack of it in New Zealand’s case) appears not at all in the text of yesterday’s MPS.

I wanted to touch on just two examples from yesterday’s document.  A year or so ago, the Reserve Bank introduced LUCI –  the labour utilisation composite index, an attempt to provide a summary measure of resource pressure in the labour market.    It was interesting innovation, if not fully persuasive as an indicator.  They ran the chart in yesterday’s document


In the text, the Bank simply notes that labour market tightness increased over 2016.  But if this indicator is supposed to be a measure of that, how seriously can we take the claim?  After all, this index appears to suggest that in the Bank’s view the labour market is now almost as tight as it was at the peak of the previous boom (late 2004?) and materially tighter than it was over say 2006 and 2007 –   a period when the unemployment rate averaged less than 4 per cent, and when wage inflation was quite high, and increasing further.

Over the last year, however

  • the unemployment rate was basically flat (actually 2016q4 was higher than 2015q4, but lets treat that as possibly just noise),
  • wage inflation was flat or falling,
  • and in the Bank’s Survey of Expectations, expectations of future wage inflation were flat as well (actually down a bit in the latest survey)

And all this when the unemployment rate has been persistently above the Bank’s own estimate of the NAIRU (which appears to still be around 4.5 per cent), let alone Treasury’s which is around 4 per cent.  There is little to suggest anything like the degree of labour market pressure that was apparent in the pre-recession years.

No doubt, there are good answers to some of these questions and apparent contradictions.  But the Bank has made no attempt to address them, even though other labour market developments –  around immigration – receive a lot of focus.  The public, and readers of the MPS, deserve better analysis than that.

The Bank’s immigration analysis has also been rather tortured.  Historically, they have worked on the basis, and produced research to support, the common view that the short-term demand effects of immigration exceeded the supply effects.    There shouldn’t be anything surprising, or very controversial, about that –  immigrants (or non-emigrants) need to live somewhere, and need all the attendant private and public infrastructure of a modern economy.  Those pressures tell one nothing about the pros and cons of immigration policy.

But in the last couple of years, the Bank has been going to great lengths to try to suggest that this time things are different: this time the composition of the immigrants is so different (than in every previous post-war cycle) that, if anything, the supply effects outweigh the demand effects, and that high net PLT immigration is part of what is keeping inflation down.

It isn’t totally impossible of course.  Fly in labourers, house them in disused prisons, forbid them from spending anything locally, and employ them only in very labour-intensive roles and the supply effects might outweigh the demand effects.  But that isn’t the modern New Zealand immigration story  (and in case anyone wants to be obtuse, obviously nor should it be).

The Bank likes to illustrate their case with charts like this one, produced again in the MPS yesterday.


It uses PLT net migration data to purport to show (a) record immigration, and (b) that that record influx is hugely concentrated among young people who, it is claimed, add more to supply than to demand, dampening inflation pressures.  The contrast is supposed to be particularly stark with the last big influx in 2002/03.  The Bank explicitly states “young migrants and those on student visas represent a much higher share of migration than in previous cycles”.

I’ve covered much of this ground before, especially in this post.   The limitations of the PLT data are well known, both in principle and in practice.    At my prompting, with the full knowledge of my then RB superiors, Statistics New Zealand produced a research note on the issue a couple of years ago.  In that document they showed how the PLT data had materially misrepresented the actual long-term migration inflow to New Zealand in the 2002/03 period (not wilfully –  just the limitations of the timely measure).  This was their chart.


So the best later estimates are that the 2002/03 influx was around 50 per cent larger than the PLT data (including the age breakdown data) the Bank is constantly citing.

We don’t have current estimates from this improved methodology for the current cycle, but one can see the point in just comparing the net PLT inflow with the net total passenger arrivals. It is a more volatile series –  things like World Cups and Lions tours help introduce volality.


But you can see the big difference between the two series over 2002/03 –  and SNZ estimated that much of that difference wasn’t very short-term tourists, it was people who ended up staying longer.  Jump forward to the current cycle: contrary to the mythology the influx of people this time round, as a share of the population,  hasn’t been larger than it was then.  The peaks are around the same, and the peak this time (at least so far) was shorter-lived than it was in 2002/03.

And what of the student story?  Well, it doesn’t really hold up either.  Here is the MBIE data on the number of people granted student visas each year, as a share of the population.


The peak isn’t as high as it was in 2002/03, and the extent of the increase is much much smaller this time.   Foreign students add to demand –  as all exports do.  (Of course, there have been some  –  somewhat controversial  – changes in student work rules, which might have mitigated the demand effects, but curiously the Bank doesn’t invoke that effect as part of its story.)

My point here is not to argue whether my conclusion (net migration tends to boost demand more than supply in the short-term) is right, or the Bank’s (this time is different) is.   And as it happens, we see eye-to-eye right now on the current stance of monetary policy.   I’m mostly concerned that the Bank seems to just ignore inconvenient data that just isn’t hard to find or use.    There might well be good counterarguments to the data points I’ve highlighted here, but instead of making those arguments, the Bank simply ignores them.  One might, sadly, expect that sort of standard from political parties and lobby groups.  We shouldn’t expect, or tolerate, it from powerful well-resourced public agencies.  The Bank’s argument is certainly fairly politically convenient: it keeps the focus off that unemployment rate that is still above the NAIRU (a gap that might be expected to be constraining inflation) and the near-complete absence of productivity growth, which might be deterring new investment (also dampening inflation pressures in the short-run).

There are plenty of complex issues around in making sense of what is going on. I certainly don’t claim to have a fully convincing story myself. But given the level of public resources put into the Reserve Bank, we should expect a lot more from them –  not just answers, but evidence of genuine intellectual curiosity, and a desire to evaluate arguments from all possible angles.  Their current policy stance is fine, but there doesn’t seem to be a strong and robust organisation, of the sort that would underpin consistently good policy through time, judged by the strength of its analysis and its openness to debate.   Yesterday’s MPS is just one more example of that.   Turning around that weakness should be one of the key challenges for the new permanent Governor.

Alternative facts: a possible interpretation

A reader who is paid to, among other things, monitor the Reserve Bank got in touch to suggest that the Reserve Bank’s claim, highlighted in this morning’s post, to have “initiated an easing cycle in June 2014” was neither a typo nor a piece of carelessness (I’d assumed the latter), but something conscious and deliberate.

Recall that in this morning’s MPS, the Bank wrote that

The Bank initiated an easing cycle in June 2014, by lowering the outlook for the policy rate from future tightening to a flat track, and then cutting the OCR from June 2015

Most people, when they think of an easing cycle or a tightening cycle, think of actual changes in the OCR.  On that conventional description, the OCR was raised four times, by 25 basis points each, from March 2014 to July 2014.  Note those dates: not only was the OCR raised in the June 2014 MPS, but it was raised again the very next month.

And if one compares the crucial final few sentences in the press releases for the March and June 2014 MPSs there is no material change in wording from one document to the other, and there is nothing in chapter 2 of the June 2014 MPS (the policy background chapter) to suggest a change in policy stance.

So how might they now –  revisionistically – attempt to describe an “easing cycle” as having been commenced in June 2014?  Well, the only possible way they could do so –  perhaps hinted at in that phraseology “by lowering the outlook for the policy rate” –  is using a change in the forecast for the 90 day rate from the previous set of projections, in March 2014, to those in the June 2014 MPS.

But here is the chart showing the two sets of projections


The differences are almost imperceptible.  In fact, the June track (red line) is very slightly above the blue line in the very near term, and at the very end of the period the difference is that the 90 day rate is projected to get to 5.3 per cent in the June 2017 quarter rather than the March 2017 quarter.  And recall that there were no contemporary words to suggest a change of stance.

Sure enough over subsequent quarters the Bank did start to revise down the future track, but there is no evidence that over that period they thought of themselves –  or openly described themselves –  as having begun an “easing” cycle.    That didn’t happen –  and even then they didn’t think of it as a “cycle” –  until the OCR was first cut in June 2015.   Here is the Governor talking about monetary policy in a February 2015 speech.

We increased the OCR by 100 basis points in the period March 2014 to July 2014 because consumer price inflation was increasing as the output gap became positive and was expected to increase further. Since July, the OCR has been on hold while we assessed the impact of the policy tightening and the reasons for the lower-than-expected domestic inflation outcomes.

The inflation outlook suggests that the OCR could remain at its current level for some time. How long will largely depend on the development of inflation pressures in both the traded and non-traded sector. The former is affected by inflation in our trading partners and movements in our exchange rate; the latter by capacity pressures in the economy and how expectations of future inflation develop in the private sector and affect price and wage setting.

In our OCR statement last Thursday we indicated that in the current circumstances we expect to keep the OCR on hold for some time, and that future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.

Again, no sense from the Governor that he was well into an “easing cycle”, as we are now apparently supposed to believe.

Now, there is a theoretical argument that the stance of monetary policy can be summarised not just by the current OCR but by the entire future expected/intended track.  But as the Reserve Bank has often –  and rightly – been at pains to point out, projections of interest rates several years in the future contain very little information, as neither the Reserve Bank nor anyone else knows much about what will be required 2 to 3 years hence.   And it is a dangerous path for them to go down, for it invites those paid to hold the Governor to account to do so not just in respect of the actions he or she takes, but in respect of their ill-informed (but best) guesses as to what the far future of the OCR might hold.

If this is the explanation for the Reserve Bank’s words this morning –  and sadly it seems like a plausible explanation –  it is, at best, a case of someone trying to be too clever be half, and change the clear meaning of plain words (to the plain reader) in mid-stream.  At best, too-clever-by-half, but at worst a deliberate attempt to use a verbal sleight of hand to deceive readers, including the members of Parliament to whom the document is, by law, formally referred.    Sadly, it looks a lot like the “alternative facts” label –  one that should be worn with shame – might have have been quite seriously warranted.  They didn’t start easing in June 2014; at best by later that year they started slowly backing away from their enthusiasm for (a whole lot more) further tightening.

I’d hoped for better from the Reserve Bank, its Governor, incoming acting Governor, and other senior managers who may perhaps have aspirations to become Governor next March.

Lewis Carroll wasn’t intending Through the Looking Glass as a prescription for how powerful senior public officials should operate.

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”


Alternative facts: Reserve Bank edition?

I might have a post later on the substance of today’s Monetary Policy Statement –  or might not, since the bottom line stance seems entirely correct to me (regular readers may think this a first).   But I couldn’t let one particularly egregious misrepresentation go by without comment; a claim so blatantly wrong that one almost had to wonder whether the Bank was now taking communications advice from Sean Spicer and Kellyanne Conway.

In each MPS Box A “Recent monetary policy decisions” appears.  This box is one of my minor legacies to the Bank.  I banged on often enough about the statutory requirements for MPSs –  which require some retrospective assessment and self-evaluation –  that they agreed to include this box. It is rarely done well and –  in fairness –  the Act probably needs changing, to provide for reviews and assessments rather less frequently.  And the content tends, perhaps inevitably, to be rather self-serving.    But the latest version was just too much.

It begins as follows

The Bank initiated an easing cycle in June 2014

When I first saw that I assumed it was just a typo –  bad enough, but these things happen.  The OCR wasn’t actually cut until June 2015.  But no, the authors were apparently serious.  The whole sentence reads

The Bank initiated an easing cycle in June 2014, by lowering the outlook for the policy rate from future tightening to a flat track, and then cutting the OCR from June 2015

Do they really expect to be taken seriously?   For a start, their statement isn’t even true.  Here is the chart of the projected 90 day interest rates from the June 2014 MPS.


The OCR was not only increased in the June 2014 MPS, but they projected another 200 basis points or so of increases.   By now –  March quarter of 2017 –  the OCR was projected to be still rising, and at 5.2 per cent.

And here was what the Governor had to say in the June 2014 MPS


There was no doubt that the Bank –  the Governor –  in June 2014 thought they would be raising the OCR a lot further, and had no thought in mind of beginning an easing cycle any time in the following few years.

I’m not sure what has gone wrong in this quarter’s Box A.    All the key players –  the Governor and his closest advisers –  were around in June 2014, and are around now.  They know what happened, and in June 2014 they were pretty confident of their tightening stance.  But they made a mistake.  It happens.     What shouldn’t happen is crude attempts to rewrite history.

I rather doubt this was deliberate on the Governor’s part –  probably some carelessness further down the organisation, and then insufficient care in reading and approving the final text.     But it isn’t a good look, and I hope they will take the opportunity to acknowledge the mistake and issue a correction.

Perhaps the FEC and/or the Bank’s Board might ask just what went on?