Inflation is running rampant in NZ. "I expect that it will be rising as it is right around the world", says the Finance Minister today. He's wrong to make that assumption.

Why should we expect inflation to be rising here like it is in other countries? Since we were meant to be exceptional. We were the country that was the first in the whole world to implement explicit inflation targets. We were the first to have a "Policy Targets Agreement", signed off by the Finance Minister and Reserve Bank Governor. It stipulates that inflation should be kept at between 1 and 3 percent over the medium term.

Yet inflation is looking like hitting about 7% shortly in NZ, maybe higher, when the latest figures are released this week. Core inflation is rising above the 1 to 3% target. The RBNZ admits this is not a temporary shock, “with a broad range of indicators highlighting domestic capacity constraints and ongoing inflation pressures”. The Policy Targets Agreement has been breached. That agreement has underpinned NZ's economic security since 1989.

Yet the PM, Finance Minister, Attorney General and the RBNZ keep trying to shift the blame by saying the situation overseas is the same as in NZ. The Summary Record of the Monetary Policy Committee's latest meeting on 13 April, 2022, for example, “noted that global consumer price inflation is high, well above most central banks’ targets”.

Shame on them for playing our media and the public for fools and preying on peoples' non-expert knowledge of monetary policy.

Let's set the record straight: although the US Federal Reserve also operates under a mandate of “stable prices”, these words are not defined by an inflation target subject to an agreement between the US Treasury Secretary & Fed Chair. For most of its history, the Fed baulked at providing even its own internal definition. Although a target did emerge when Ben Bernanke was Chair, the Fed subsequently changed it into one that was intentionally vague and ambiguous.

By contrast, our RBNZ has no such discretion to play around with the meaning of price stability. The whole point of the explicit inflation target in the Policy Targets Agreement is to “provide a clear agreement between policy makers, thereby limiting the scope for discretionary policy actions”. Who’s the quote from? A bloke called Adrian Orr writing for OECD Policy Studies in 1994.

Not one overseas Central Bank is operating under the same legal structures, the same RBNZ Act, nor the same Policy Targets Agreement, as ours. The US Federal Reserve and the US Treasury Secretary have not broken ANY agreement on inflation which they signed up to. Our Finance Minister and our RBNZ have just driven a truck through one.


It has been amusing to read the commentators in the mainstream media discuss the Reserve Bank's Official Cash Rate (OCR) rise. They actually think it will have a big effect in terms of quelling inflation (!) The NZ Herald's Business-Editor-At-Large writes how "today's move was a clear signal that the RBNZ is prepared to front load the hikes in an effort to get ahead of the inflation curve".

The Herald must be kidding. With inflation expected to shortly rise to around 7 percentage points, the idea that a 0.50 percentage point increase in the OCR will have any kind of significant effect on inflation is ludicrous.

So why do it? The rate rise is just a Public Relations / Comms exercise of the type that we've come to expect from this Government-and-RBNZ-of-Spin. It is about giving the appearance of concern for inflation.

What's the basis for such claims? To quell an inflationary shock requires an increase in the OCR of greater than one percentage point for every one percentage point increase in the inflation rate (according to the Taylor Rule). Inflation as at March 2021 was 1.5%. Inflation as at March 2022 is expected to be 6.6%. So to get "ahead of the inflation curve", an increase in the OCR of at least 5.1 percentage points would have been required over this period (=6.6 minus 1.5).

Yet the RBNZ has only increased the OCR by a little over ONE percentage point the past year. The Taylor Rule exposes the Bank's complete disregard for its legal mandate - which is to keep inflation in the 1 to 3 percentage point range.

After having kept the OCR so low for so long on top of its' $60 billion Quantitative Easing Program which sent house prices berserk & led to a borrowing binge, the RBNZ is panicking at the prospect of a reversal that will reveal its past mistakes. So it is now playing politics and trying to deflect anger, not conducting best-practice monetary policy.

By doing so, what's scary is that the Bank has taken the country to the casino. It is gambling that the current inflationary shocks are transitory & will quickly reverse. To the extent inflation does fall in the coming year or two, it will have little to do with this OCR rise.

Yes, the Bank is playing our politicians and the Kiwi media for fools. It is pretending to be concerned about inflation by increasing the OCR when in fact the tiny size of its interest rate hikes will have little impact on inflation outcomes in NZ.




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Robert MacCulloch