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The Case against the RBNZ and Finance Minister

Today I wrote an Opinion Piece for the NZ Herald which is on the front page of their publication on the web. You can read it below or at this link:

https://www.nzherald.co.nz/business/robert-macculloch-the-case-against-the-reserve-bank-and-the-finance-minister/WANWN3KGNDS5SWES3N2URJZROM/


The Reserve Bank of NZ (RBNZ) has a formal objective to keep inflation in the range of 1 to 3 percentage points, as specified by the Remit for the Monetary Policy Committee (MPC), which was signed and “agreed by” the Governor and Finance Minister. This range constitutes the official definition of “maintaining stability in the general level of prices” in the RBNZ Act. However, both signatories to the Remit have gone and wilfully ripped up their sworn aim.


Let’s build the prosecution’s case. Exhibit A is that the defendants have already admitted guilt. At the last meeting of the Bank’s Monetary Policy Committee (MPC) its members confessed that annual consumer price inflation is expected to peak around 7 percent in the first half of 2022”.


Are the shocks hitting us short to medium term? No. The Bank says A broad range of indicators are highlighting … ongoing inflation pressures”. Has the misconduct of monetary policy which has been inciting the inflationary breach ended? No. The Bank says that the Official Cash Rate (OCR) “is stimulatory at its current level”.


Not only has NZ’s inflation target been ignored, but the defendants who were charged with achieving it are still pouring gasoline on the fire, as we speak.


Exhibit B comes from an expert witness, Professor John Taylor, inventor of the “Taylor Rule”. That Rule is a simple formula explaining how a Central Bank can quell an inflationary shock. It has proved extremely influential as a robust guideline when setting Official Cash Rates around the world.


What does it say? To contain a surge in prices, the Rule states than an increase in the OCR of more than one percentage point is required when inflation increases by one percentage point. The reason is to ensure that real interest rates go up to reduce borrowing. Without a rise in real rates, debt financed spending can continue to fuel inflation.


So what’s been going on in NZ? Annual inflation, measured at March 2021, was 1.5%. Annual inflation at March 2022 was 6.9%. In other words, inflation has risen by over FIVE percentage points this past year. However the RBNZ has only increased the OCR by little over ONE percentage point over the same period, sending short term real rates deeply negative. The Taylor Rule is powerful evidence that there has been no intention, whatsoever, of our authorities to meet their obligations in terms of keeping inflation on target.


Exhibit C is NZ’s record low unemployment rate, which stands at 3.2 percent. Had unemployment been sharply increasing, there would have been a justification for holding back on steep hikes in the OCR to contain inflation. Yet the MPC says employment is above its maximum sustainable level”. Our super tight labour market provides no argument for the defence.


In their desperation to be declared innocent of breaching NZ’s agreed inflation aims in the face of overwhelming evidence to the contrary, the Governor of the RBNZ and Finance Minister have claimed others are committing the same offence. Global consumer price inflation is high, well above most central banks’ targets”, argues the Monetary Policy Committee.


Attempts to present the situation abroad as being the same as in NZ are misleading. Although the US Federal Reserve also has a mandate of “stable prices”, these words are not defined in terms of an inflation target that has ever been “agreed” by the Fed Chair and US Treasury Secretary.


For most of its history, the Fed baulked at providing even its own internal definition. Although a target did emerge when Ben Bernanke was Chairman, the Fed subsequently changed it into one that was intentionally vague and ambiguous. Targets are not all alike, contrary to the MPCs insinuation.


In stark contrast to the Fed, our RBNZ has no discretion to play around with the meaning of price stability. The point of the explicit inflation target signed off between the RBNZ Governor and Finance Minister has been 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.


So what has been driving OCR decisions? Populism. After having kept the cash rate so low for so long and embarked on a $53 billion Quantitative Easing (QE) Program, the Bank is now in panic mode. It is panicking at the prospect of a full-on policy reversal that will highlight past mistakes and provoke widespread debt distress.


To the extent folks get into trouble paying back their mortgages the next few years, the blame lies squarely with our RBNZ Governor and Finance Minister. Together they encouraged a borrowing binge to buy houses at wildly inflated prices, financed by dirt cheap credit, both of them turning a blind eye to the breach of the target to which they mutually agreed, neither of them learning the lessons of the Global Financial Crisis in 2008.


The RBNZ was once lauded around the world for making NZ exceptional. It pioneered inflation targeting. We became the gold standard of monetary credibility. Now our hard-fought success and huge reputation built up over 30 years lie in ruins. Exhibits A, B and C reveal how the RBNZ and Finance Minister have overseen the trashing of their “agreed” inflation target.


The official defence is that other Central Banks are just as bad. That’s not true. Not one of them operates under the same laws as ours.


The US Fed Chair and Treasury Secretary have not broken any agreement. By comparison, our RBNZ Governor and Finance Minister have driven a truck through their one. It happens to be the single most important agreement that has been underpinning our economic security since 1989.