The Reserve Bank's 'least regrets' money printing & LVR removal drove over a third of the 7.3% inflation, while global food & fuel drove the rest; an Australian-style review of central bank is needed
No quick fix for inflation? But maybe it can be mitigated by dropping GST back to its original 10% & replacing the tax shortfall with a PAYE/Company rate increase for the top 10% of earners. In this economic climate any in the top 10% of earners are likely doing so by gouging the rest of NZ.
Drop GST (fullstop). And replace it with a Financial Transaction Tax (FTT) at 1%. You spend $100, you pay a $1 FTT.
Result is a 10% drop in your supermarket bill, and all those gamblers and speculators who treat money as a commodity rather than a medium of exchange have to pay up, or find something more productive to do with their time.
The drop of GST to 10% could be an immediate fix for either heading off entirely or getting ahead of any resulting inflationary wage/price cycle.
Since It is universal covers middle income to the lowest income and would be far better than increases in limited one off payments, longer term subsidies, or benefit payments.
Given the wider range of people covered it would be significantly more politically popular than any new capital tax, which has been ruled out by our current PM.
Former Chancellor of the Exchequer Norman Lamont famously claimed to have sung Edith Piaf in the bath after allowing Sterling to crash out of the Exchange Rate Mechanism. No regrets there supposedly. Good idea to have a parliamentary select committee interview the Reserve Bank but surely it is really second-guessing when they faced an unknown and nearly impossible-to-forecast crisis in the pandemic? We may want the result to have been different but they were driving into a storm. I also question just how much inflation is domestically driven as even the domestic components are affected by global factors such as supply chain problems, materials demand, and missing workers in many industries. Given 11% inflation in the UK and high inflation in the US it seems we are part of a global trend which others forecast over the past two years. Love, Peter
Ha! Love the idea of Norman in the bath. Sort of. I think we need more than a select committee review. The argument about unknown unknowns and known unknowns is powerful for the first three or four months. But we knew by July/August of 2020 that things had settled. We certainly still shouldn't be lending banks cheap money via Funding for Lending. Our central bank could be just as wrong as the others, but hopefully they wouldn't make the same mistake again. I think the others would. And why we need our own review to put the blowtorch to the Reserve Bank's belly.
The trouble with putting supposedly independent civil servants into a political melee, especially with blow torches, is that they then behave differently in future.
Also, the idea of Norman Lamont naked is almost too much to bear. Mind you, there is an excellent story -- well-reported -- of him turning up at a potential girlfriend's house (when I say girlfriend I mean another man's wife and someone married into the Forte hotel family) and leaving with a black eye when her husband took against that idea.
'No, I didn't think so.' - summed up the opposition perfectly. The 'renewed' opposition are basically Newstalk ZB soundbites and not a lot more.
They really need to consider a new strategy for the coming year. I see the latest Curia poll has National, and particularly Luxon, tracking down. It will be interesting to see if that trend continues, and whether National realises they actually need to start bringing solutions to the table.
Thanks Rory. For now National is safe to make oppositional noises without policy detail. That vacuum will close towards the end of this year. By then, there had been to be some policy grunt emerging.
How much of our domestic inflation is caused by exporters imposing export prices onto the domestic market? That $20/kg price for Tasty cheese for example.
Sell on the local market at cost-plus, and grab the best price you can get by exporting what isn't sold in NZ.
Although that isn't the done thing because it is not providing the highest return to shareholders.
Thanks Steve. I agree the international food and fuel prices are a factor the RBNZ can't be blamed for. And at the moment I can't find an easy way to measure the margin expansion. The Commerce Commission are having a crack with their market studies of building materials, fuel and supermarkets. We'll see.
While I appreciate a good pile-on when someone has cocked up I do think the sun has passed with respect to dunking on the RBNZ and the lack of anyone having real alternative pathways out of the quagmire is becoming apparent.
It smells a little of the good old debate stalwart of "we would just grow the pie through strong economic management"
I think proper reform is needed around taxes and the Government approach to infrastructure investment, social spending, R&D and businesses investment. Lots more of all, funded by a land tax on residential zoned land.
Is this a RBNZ problem or the reliance on private banking as a conduit for public money, as suggested in previous discussions? Will a CBDC begin to provide a more responsive system of support during emergencies and transitions?
Bank lending growth into mortgages hasn't always been this strong. Only over the last 30 years or so, in part because the Basle rules made it cheap from a capital retention point of view and the long-run fall in interest rates seemed to make it thrillingly easy and profitable for everyone. Until it didn't.
Looking at the fine print on the funding for lending program, the amount banks could loan was capped at 4% of eligible loans, for the first 18 months (ending June 2022), with a further 2% given for the last 6 months of the program. Is there the potential that banks ran out of the cheap money Q1/2 this year, which could have had some effect on housing market decline? Could we also now see a flatting or even increase of house prices, now the banks as of June, have fresh cheap cash to splash? Reinz data for June had a 2.8% increase month to month for Auckland prices, July’s data will be increasing! Also, this line ‘the bank reserves the right to alter the date, time, and settlement of the facility operational window at any time’... RBNZ can close it down anytime it wants
Interesting point. Hard to see problems for the banks with funding sources. Plenty there, just not very cheap. Will keep a close eye on the lending growth figures. There may be an element of dead cat bounce in that June move in Auckland. We'll see.
Please release this Bernard. We do need a thorough review of Covid money spreading. Please no more stupid politicians crying” austerity” , “budget like a household” and that sort of nonsense. Meanwhile the World burns or wars or droughts or floods or tornadoes all due to a greedy little species known as homo “sapiens” . Hardly. Change the system to get some work on climate change which is the “sapiens” related problem that we all ignore because God Forbid our house prices may fall. Have a happy day!
Agree it is time for a deep dive into why the Reserve Bank made such large policy errors. Record low interest Rates with removal of LVR's shows all they wanted to use the House Wealth lever to boost spending. This will go down in history as one of New Zealand's great policy blunders. Its no use questioning Orr about this as the response as his has always been "we have no regrets". Interview others outside of the Terrace grouped Treasury and Reserve bank. Also while at it look at the inflation targeting mandate. Maybe focus it on what we can control ie non tradable inflation
Arthur, what if we include the possibility that these aren't "errors" of "blunders"? What if it's deliberate, intentional policy? That would explain all of it.
I just can't believe that the senior levels of government, elected or not, don't know what they're doing. Let's at least consider the possibility, if not the probability.
That is correct. It was DELIBERATE, INTENTIONAL policy.
In 2016 I was forced to leave my home town of Nelson when housing prices and consequently rents increased to an amount I could not afford. Finished up in Invercargill, which is quite a pleasant place to exist/live. (and where alcohol is extremely expensive)
In 2020 the RBNZ employees who comprised the monetary policy committee DELIBERATELY and INTENTIONALLY increased the cost/price of housing in New Zealand. Because I knew from personal experience the horrendous/terrible consequences that would have on NZ society I sent the following e-mail to Grant Robertson on 09 September 2020:
"I am horrified by recent statements made by RBNZ economist Yuong Ha which I heard him say on TV recently. He is an extremely dangerous menace to the well-being of New Zealand society!!! What he intends to do will further fuel the raging inferno of increasing housing prices in New Zealand. He is obsessed with increasing the wealth of those who own residential property in New Zealand and has no consideration whatsoever for the horrendous/terrible effects that is having on New Zealand society!!! ....."
I subsequently received a reply from Grant Robertson the content of which proved that he was/is also a culprit.
Thanks Arthur. The more interesting questions I think will be for Luxon and Willis if they win Government, and whether they're planning one in their election platform. The other issue is whether they'll be ok with Labour reappointing Orr for a second term. The reappointment moment is shortly before the caretaker period before the next election campaign.
Can someone explain why we are seeing inflation now after this round of QE, but we never saw inflation after the QE in USA after the GFC. Is it just because that the numbers are bigger.
Because the numbers this time were staggeringly large. In addition it was done across the world simultaneously.
The other thing to remember is whe have consistently had non-tradable inflation above the CPI, but it gets dragged down by importing “deflation” through cheaper goods (mainly from China). We still have inflation but have masked it for 40 years by bringing around 25% of the planets population (China/India) into the global manufacturing workforce driving down the price of goods. Due to geopolitical events (covid/Ukraine), demographic (population in China aging fast due to 1 child policy) and socioeconomic (China has seen some of the fastest wage growth in history) that imported deflation impact will lessen over the next decade.
The idea we have pervasive deflation is built on the assumption we can keep adding new “china’s” to the global workforce, but that was a one-off never to be repeated on that scale
That's fair on the lack of an ongoing positive supply shock from China. I think though we forget the positive supply shock from tech in services is very much still around and will only get bigger.
Thanks RG. Good question. You're right. The central banks printed US$9 trillion in less tha a year after Covid arrived, whereas they printed less than US$3t during the whole of the GFC. The spark that lit the pile of paper this time was the supply shocks from Covid and the war at the same time. Here's some detail on that. https://www.yardeni.com/pub/balsheetwk.pdf
Spot on assessment of the RBNZ’s utter policy failure. You correctly identify the difference between the initial response (when there was massive levels of uncertainty) and when it became clear the economy would quickly rebound.
Removing the LVR’s was NEVER appropriate.
But when the economy was recovering strongly Orr kept saying “we don’t want to raise rates”. Returning the OCR to pre covid levels wasn’t “raising rates” it was unwinding stimulus that was no longer required.
While the argument that only a portion of inflation is the result of the RBNZ, the rest of the inflation was the result of all the other muppets in charge of central banks across the world making the same sorts of mistakes.
When all is said and done our current predicament post 2008 will be known as the “central bank bubble”. Because right across the world there is a belief we no longer have recessions, downturns, credit crises or large company failures, because the central banks can always just print more money and fix everything. We have now seen the limitations of what central banks can do without creating massive unintended consequences. Yet still there is a pervasive belief that central banks can/will start cutting rates if we get a downturn and save the day again - this will eventually blow up spectacularly, the only question is when.
I can't help but notice the basic assumptions in your comment. First you say "policy failure", but perhaps it's policy success, achieving its intentional result. Then you say that all central banks are making the same "mistakes". Is that really possible? What if they're not mistakes, what if they know exactly what they're doing? And then you say "creating massive unintended consequences". Unintended? How do you know?
Thanks Marc. I hope creating too much inflation wasn't the aim. Creating a wealth effect was. That worked, but too well. I have to take our Reserve Bank at its word that it didn't want to create inflation and also wasn't happy with the 45% rise. It does seem happy with a 30-40% rise though.
I'm not so sure it will blow up. The deflationary pressures will return to give the central banks cover to use wealth effects to stimulate. And there is no limit to how much they can print, and the beneficiaries of those policies are the ones with the most democratic voice.
"the central banks can always just print more money and fix everything."
printing more money to the degree/extent that was done in NZ doesn't fix everything. it plunges low to middle income people (and their dependents) who exist in rental accommodation into deprivation and hardship.
Without doubt there should be an independent inquiry into the RB and government handling of finance’s ! That should go without saying since we have just come through a “once in a century pandemic” I use that quote loosely!
Any honest government worth there salt would insist on it.
There is a great deal of hindsight wisdom being brought to bear on the Reserve Bank's 'least regrets' actions. That meant it was prepared to run this risk, versus bankruptcies two years ago and following, and lots of unemployment, because it had held interest rates too high. I am interested in where the 'one third of the current 7.3% is down to the RB' estimation comes from. For a start, if that is right, which is very unlikely, then with a max target of 3%, the RB is not technically at fault for being responsible for a third of the 7.3% inflation rate (would be around 2.4% down to the RB). This kind of attribution is precious, and no modeller should be trying to cut this kind of cake as it is so misleading to people whose jobs aren't as economists.
I would challenge you Bernard to contact Arthur and ask him for references to the times (once, twice, dates?) he publicly over the period he is concerned about spoke out against the Bank's easing, explicitly saying he felt the downstream inflation risk was far too high. He may well have, but absent that for now, I am not impressed. At least it is noted here that this central bank was ahead of others in turning around. I would ask if the Aussie Reserve Bank is taking the same heat for its decisions, with their forecast annual rate to June 2022 at 6.2%? I have a strong feeling that the animus evident not just here but elsewhere in NZ econ commentary against our central bank has a different source from just the technical figures. It does not look at all good to me. There is a fundamental confusion here between the RBNZ's role in the 20/21 house price surge ( an unfortunate side effect of the necessity in 2020 uncertainty to drop interest rates sharply to keep the economy going) and decades of stupid neglect by Governments of NZ's housing market fundamentals. The RBNZ does not build houses. It has a decades long track record of research and accessible writing urging the Govts of the past to do something about supply of land, badly organised regulation and markets for materials - all to its credit. Govts simply have not listened.
Thanks Clive. I limited my estimate to those parts of inflation that could directly tied to the housing market. I know Arthur was very uncomfortable right from the start and said so in his version of the public, which may not be the same as the front page of the DomPost.
I was also critical of the money printing from the start. The RBNZ knew about the lack of supply elasticity and used it to generate a wealth effect, deliberately. It was effectively using an unfair social policy of making one segment of the population richer to achieve a monetary policy goal. I opposed that. But I also agree the Government (of both shades) deserve the real blame for creating the infrastructure shortages that led to the inelasticity. cheers. Bernard
You mentioned in this podcast that Grant Robertson approved a lot of the decisions that the reserve bank made. I would love to know what your opinion is on what those decisions would have looked like had someone like Christopher Laxon been in power at the time or what you think they may look like in the future if national comes into power.
No quick fix for inflation? But maybe it can be mitigated by dropping GST back to its original 10% & replacing the tax shortfall with a PAYE/Company rate increase for the top 10% of earners. In this economic climate any in the top 10% of earners are likely doing so by gouging the rest of NZ.
Hi David
Drop GST (fullstop). And replace it with a Financial Transaction Tax (FTT) at 1%. You spend $100, you pay a $1 FTT.
Result is a 10% drop in your supermarket bill, and all those gamblers and speculators who treat money as a commodity rather than a medium of exchange have to pay up, or find something more productive to do with their time.
The drop of GST to 10% could be an immediate fix for either heading off entirely or getting ahead of any resulting inflationary wage/price cycle.
Since It is universal covers middle income to the lowest income and would be far better than increases in limited one off payments, longer term subsidies, or benefit payments.
Given the wider range of people covered it would be significantly more politically popular than any new capital tax, which has been ruled out by our current PM.
I quite like the idea of a windfall tax to offset a GST cut. And a land tax. Surefire election winner. :)
Former Chancellor of the Exchequer Norman Lamont famously claimed to have sung Edith Piaf in the bath after allowing Sterling to crash out of the Exchange Rate Mechanism. No regrets there supposedly. Good idea to have a parliamentary select committee interview the Reserve Bank but surely it is really second-guessing when they faced an unknown and nearly impossible-to-forecast crisis in the pandemic? We may want the result to have been different but they were driving into a storm. I also question just how much inflation is domestically driven as even the domestic components are affected by global factors such as supply chain problems, materials demand, and missing workers in many industries. Given 11% inflation in the UK and high inflation in the US it seems we are part of a global trend which others forecast over the past two years. Love, Peter
Ha! Love the idea of Norman in the bath. Sort of. I think we need more than a select committee review. The argument about unknown unknowns and known unknowns is powerful for the first three or four months. But we knew by July/August of 2020 that things had settled. We certainly still shouldn't be lending banks cheap money via Funding for Lending. Our central bank could be just as wrong as the others, but hopefully they wouldn't make the same mistake again. I think the others would. And why we need our own review to put the blowtorch to the Reserve Bank's belly.
The trouble with putting supposedly independent civil servants into a political melee, especially with blow torches, is that they then behave differently in future.
Also, the idea of Norman Lamont naked is almost too much to bear. Mind you, there is an excellent story -- well-reported -- of him turning up at a potential girlfriend's house (when I say girlfriend I mean another man's wife and someone married into the Forte hotel family) and leaving with a black eye when her husband took against that idea.
'No, I didn't think so.' - summed up the opposition perfectly. The 'renewed' opposition are basically Newstalk ZB soundbites and not a lot more.
They really need to consider a new strategy for the coming year. I see the latest Curia poll has National, and particularly Luxon, tracking down. It will be interesting to see if that trend continues, and whether National realises they actually need to start bringing solutions to the table.
Thanks Rory. For now National is safe to make oppositional noises without policy detail. That vacuum will close towards the end of this year. By then, there had been to be some policy grunt emerging.
How much of our domestic inflation is caused by exporters imposing export prices onto the domestic market? That $20/kg price for Tasty cheese for example.
Sell on the local market at cost-plus, and grab the best price you can get by exporting what isn't sold in NZ.
Although that isn't the done thing because it is not providing the highest return to shareholders.
Thanks Steve. I agree the international food and fuel prices are a factor the RBNZ can't be blamed for. And at the moment I can't find an easy way to measure the margin expansion. The Commerce Commission are having a crack with their market studies of building materials, fuel and supermarkets. We'll see.
While I appreciate a good pile-on when someone has cocked up I do think the sun has passed with respect to dunking on the RBNZ and the lack of anyone having real alternative pathways out of the quagmire is becoming apparent.
It smells a little of the good old debate stalwart of "we would just grow the pie through strong economic management"
I think proper reform is needed around taxes and the Government approach to infrastructure investment, social spending, R&D and businesses investment. Lots more of all, funded by a land tax on residential zoned land.
Is this a RBNZ problem or the reliance on private banking as a conduit for public money, as suggested in previous discussions? Will a CBDC begin to provide a more responsive system of support during emergencies and transitions?
Bank lending growth into mortgages hasn't always been this strong. Only over the last 30 years or so, in part because the Basle rules made it cheap from a capital retention point of view and the long-run fall in interest rates seemed to make it thrillingly easy and profitable for everyone. Until it didn't.
Looking at the fine print on the funding for lending program, the amount banks could loan was capped at 4% of eligible loans, for the first 18 months (ending June 2022), with a further 2% given for the last 6 months of the program. Is there the potential that banks ran out of the cheap money Q1/2 this year, which could have had some effect on housing market decline? Could we also now see a flatting or even increase of house prices, now the banks as of June, have fresh cheap cash to splash? Reinz data for June had a 2.8% increase month to month for Auckland prices, July’s data will be increasing! Also, this line ‘the bank reserves the right to alter the date, time, and settlement of the facility operational window at any time’... RBNZ can close it down anytime it wants
That should say ‘July’s data will be interesting’ but perhaps a Freudian slip
Interesting point. Hard to see problems for the banks with funding sources. Plenty there, just not very cheap. Will keep a close eye on the lending growth figures. There may be an element of dead cat bounce in that June move in Auckland. We'll see.
Please release this Bernard. We do need a thorough review of Covid money spreading. Please no more stupid politicians crying” austerity” , “budget like a household” and that sort of nonsense. Meanwhile the World burns or wars or droughts or floods or tornadoes all due to a greedy little species known as homo “sapiens” . Hardly. Change the system to get some work on climate change which is the “sapiens” related problem that we all ignore because God Forbid our house prices may fall. Have a happy day!
Patrick Medlicott
Thanks Patrick. Have done. Will do on the happy day! Cheers.
Agree it is time for a deep dive into why the Reserve Bank made such large policy errors. Record low interest Rates with removal of LVR's shows all they wanted to use the House Wealth lever to boost spending. This will go down in history as one of New Zealand's great policy blunders. Its no use questioning Orr about this as the response as his has always been "we have no regrets". Interview others outside of the Terrace grouped Treasury and Reserve bank. Also while at it look at the inflation targeting mandate. Maybe focus it on what we can control ie non tradable inflation
Arthur, what if we include the possibility that these aren't "errors" of "blunders"? What if it's deliberate, intentional policy? That would explain all of it.
I just can't believe that the senior levels of government, elected or not, don't know what they're doing. Let's at least consider the possibility, if not the probability.
"What if it's deliberate, intentional policy?"
That is correct. It was DELIBERATE, INTENTIONAL policy.
In 2016 I was forced to leave my home town of Nelson when housing prices and consequently rents increased to an amount I could not afford. Finished up in Invercargill, which is quite a pleasant place to exist/live. (and where alcohol is extremely expensive)
In 2020 the RBNZ employees who comprised the monetary policy committee DELIBERATELY and INTENTIONALLY increased the cost/price of housing in New Zealand. Because I knew from personal experience the horrendous/terrible consequences that would have on NZ society I sent the following e-mail to Grant Robertson on 09 September 2020:
"I am horrified by recent statements made by RBNZ economist Yuong Ha which I heard him say on TV recently. He is an extremely dangerous menace to the well-being of New Zealand society!!! What he intends to do will further fuel the raging inferno of increasing housing prices in New Zealand. He is obsessed with increasing the wealth of those who own residential property in New Zealand and has no consideration whatsoever for the horrendous/terrible effects that is having on New Zealand society!!! ....."
I subsequently received a reply from Grant Robertson the content of which proved that he was/is also a culprit.
Thanks Arthur. The more interesting questions I think will be for Luxon and Willis if they win Government, and whether they're planning one in their election platform. The other issue is whether they'll be ok with Labour reappointing Orr for a second term. The reappointment moment is shortly before the caretaker period before the next election campaign.
Can someone explain why we are seeing inflation now after this round of QE, but we never saw inflation after the QE in USA after the GFC. Is it just because that the numbers are bigger.
Because the numbers this time were staggeringly large. In addition it was done across the world simultaneously.
The other thing to remember is whe have consistently had non-tradable inflation above the CPI, but it gets dragged down by importing “deflation” through cheaper goods (mainly from China). We still have inflation but have masked it for 40 years by bringing around 25% of the planets population (China/India) into the global manufacturing workforce driving down the price of goods. Due to geopolitical events (covid/Ukraine), demographic (population in China aging fast due to 1 child policy) and socioeconomic (China has seen some of the fastest wage growth in history) that imported deflation impact will lessen over the next decade.
The idea we have pervasive deflation is built on the assumption we can keep adding new “china’s” to the global workforce, but that was a one-off never to be repeated on that scale
That's fair on the lack of an ongoing positive supply shock from China. I think though we forget the positive supply shock from tech in services is very much still around and will only get bigger.
Thanks RG. Good question. You're right. The central banks printed US$9 trillion in less tha a year after Covid arrived, whereas they printed less than US$3t during the whole of the GFC. The spark that lit the pile of paper this time was the supply shocks from Covid and the war at the same time. Here's some detail on that. https://www.yardeni.com/pub/balsheetwk.pdf
Hi Bernard. I support opening this up. It is very important that the public knows what is going on. Thank you.
Thanks Al. Will do.
Spot on assessment of the RBNZ’s utter policy failure. You correctly identify the difference between the initial response (when there was massive levels of uncertainty) and when it became clear the economy would quickly rebound.
Removing the LVR’s was NEVER appropriate.
But when the economy was recovering strongly Orr kept saying “we don’t want to raise rates”. Returning the OCR to pre covid levels wasn’t “raising rates” it was unwinding stimulus that was no longer required.
While the argument that only a portion of inflation is the result of the RBNZ, the rest of the inflation was the result of all the other muppets in charge of central banks across the world making the same sorts of mistakes.
When all is said and done our current predicament post 2008 will be known as the “central bank bubble”. Because right across the world there is a belief we no longer have recessions, downturns, credit crises or large company failures, because the central banks can always just print more money and fix everything. We have now seen the limitations of what central banks can do without creating massive unintended consequences. Yet still there is a pervasive belief that central banks can/will start cutting rates if we get a downturn and save the day again - this will eventually blow up spectacularly, the only question is when.
I can't help but notice the basic assumptions in your comment. First you say "policy failure", but perhaps it's policy success, achieving its intentional result. Then you say that all central banks are making the same "mistakes". Is that really possible? What if they're not mistakes, what if they know exactly what they're doing? And then you say "creating massive unintended consequences". Unintended? How do you know?
I think you get my drift.
Thanks Marc. I hope creating too much inflation wasn't the aim. Creating a wealth effect was. That worked, but too well. I have to take our Reserve Bank at its word that it didn't want to create inflation and also wasn't happy with the 45% rise. It does seem happy with a 30-40% rise though.
I'm not so sure it will blow up. The deflationary pressures will return to give the central banks cover to use wealth effects to stimulate. And there is no limit to how much they can print, and the beneficiaries of those policies are the ones with the most democratic voice.
"the central banks can always just print more money and fix everything."
printing more money to the degree/extent that was done in NZ doesn't fix everything. it plunges low to middle income people (and their dependents) who exist in rental accommodation into deprivation and hardship.
Without doubt there should be an independent inquiry into the RB and government handling of finance’s ! That should go without saying since we have just come through a “once in a century pandemic” I use that quote loosely!
Any honest government worth there salt would insist on it.
There is a great deal of hindsight wisdom being brought to bear on the Reserve Bank's 'least regrets' actions. That meant it was prepared to run this risk, versus bankruptcies two years ago and following, and lots of unemployment, because it had held interest rates too high. I am interested in where the 'one third of the current 7.3% is down to the RB' estimation comes from. For a start, if that is right, which is very unlikely, then with a max target of 3%, the RB is not technically at fault for being responsible for a third of the 7.3% inflation rate (would be around 2.4% down to the RB). This kind of attribution is precious, and no modeller should be trying to cut this kind of cake as it is so misleading to people whose jobs aren't as economists.
I would challenge you Bernard to contact Arthur and ask him for references to the times (once, twice, dates?) he publicly over the period he is concerned about spoke out against the Bank's easing, explicitly saying he felt the downstream inflation risk was far too high. He may well have, but absent that for now, I am not impressed. At least it is noted here that this central bank was ahead of others in turning around. I would ask if the Aussie Reserve Bank is taking the same heat for its decisions, with their forecast annual rate to June 2022 at 6.2%? I have a strong feeling that the animus evident not just here but elsewhere in NZ econ commentary against our central bank has a different source from just the technical figures. It does not look at all good to me. There is a fundamental confusion here between the RBNZ's role in the 20/21 house price surge ( an unfortunate side effect of the necessity in 2020 uncertainty to drop interest rates sharply to keep the economy going) and decades of stupid neglect by Governments of NZ's housing market fundamentals. The RBNZ does not build houses. It has a decades long track record of research and accessible writing urging the Govts of the past to do something about supply of land, badly organised regulation and markets for materials - all to its credit. Govts simply have not listened.
Thanks Clive. I limited my estimate to those parts of inflation that could directly tied to the housing market. I know Arthur was very uncomfortable right from the start and said so in his version of the public, which may not be the same as the front page of the DomPost.
I was also critical of the money printing from the start. The RBNZ knew about the lack of supply elasticity and used it to generate a wealth effect, deliberately. It was effectively using an unfair social policy of making one segment of the population richer to achieve a monetary policy goal. I opposed that. But I also agree the Government (of both shades) deserve the real blame for creating the infrastructure shortages that led to the inelasticity. cheers. Bernard
I went hunting for the recent comment referenced from John McDermott and Arthur Grimes and found this: https://www.nzinitiative.org.nz/reports-and-media/opinion/transcript-oliver-hartwich-and-john-mcdermott-discuss-winding-back-the-overhang-of-monetary-stimulus/ Interesting comment at 14:32 about the Reserve Bank having lost real money.
Hi Bernard,
You mentioned in this podcast that Grant Robertson approved a lot of the decisions that the reserve bank made. I would love to know what your opinion is on what those decisions would have looked like had someone like Christopher Laxon been in power at the time or what you think they may look like in the future if national comes into power.