• rmacculloch

Is the RBNZ about to spark a financial crisis?

Today inflation hit a near ten year high and is forecast to go higher still, to above 4%. As a result, the Reserve Bank of NZ hiked the Official Cash Rate. So, by the way, what is the effect of a pandemic on the inflation rate? According to our very same Reserve Bank, the answer is: "The global economic disruption caused by the Covid-19 pandemic is expected to .. lead to lower economic growth, employment & inflation both in NZ & abroad".

Oh, so the answer is lower inflation, is it? Maybe even disinflation? So how did the RBNZ react to its own (mistaken) belief? By embarking on a $100 billion "Quantitative Easing" (QE) program. The result? A "catastrophe" according to a former Chairman of the RBNZ Board, Arthur Grimes. He blames QE for increasing house prices "by 30 per cent in just 16 months .. the central culprit has been monetary policy that has flooded the economy with liquidity".

During these previous 16 months, thousands of Kiwis bought residential properties at grossly inflated prices, financed largely by loans at super low interest rates. A few months ago the RBNZ panicked & brought a premature end to its $100 billion QE program. Today it panicked again. Inflationary pressures caused by supply chain disruptions & skill shortages, turned the Reserve Bank into a "Reverse Bank". Yes it hiked rates on thousands of Kiwis who've just bought houses at runaway prices due to the QE program. Given the uncertainty that now hangs over the Kiwi economy there's a real chance that house prices could tumble, which in the presence of rising interest rates and on the back of high leverage, could spark a crisis. One engineered by our very own RBNZ.

You wont hear accusations of reckless behavior of the Reserve Bank coming from the private bank economists though. They have to "stay in" with the government. Critiquing it may lead to trouble for their boss. Not that we care about such issues at this blog. We've got nothing to lose - having already been ruled out of contention for government posts due to our commentary. Knowing a thing or two about monetary policy is irrelevant to being on the RBNZ's board. A chapter of a book which I wrote on this topic can be downloaded for free below. Other chapters are by current US Federal Reserve Chair, Janet Yellen, Nobel Laureate Robert Shiller, former US Treasury Secretary & Harvard President Larry Summers and the Chair of President Obama's Council of Economic Advisers, Alan Kruger.