Saturday, July 30, 2022

Oliver Hartwich: Focus on price stability

The Initiative’s reports often attract media attention. Nothing, however, could have prepared us for the storm following the release of How central bank mistakes after 2019 led to inflation.

Global media covered our report, from Bloomberg to France’s Les Echos, from the UK’s Daily Telegraph to the Australian Financial Review, and from Brazil’s Plu7 TV channel to the Philippines’ Business Mirror. It confirms that the monetary policy issues we outlined in the report are of global concern.

In New Zealand, too, our report caused considerable debate in the media. It also triggered a political response.

Shortly after the release on Tuesday, Minister of Finance Grant Robertson issued a statement, saying “The RBNZ does have my confidence.”

Perhaps that level of ministerial support was necessary because, at the same time, National’s leader Chris Luxon proposed an independent inquiry into the RBNZ on the back of our report.

Luxon’s call made him a strange bedfellow of Greens MP Chlöe Swarbrick, who has been demanding a similar inquiry since February. ACT leader David Seymour has also criticised the RBNZ, saying that Governor Adrian Orr should not be reappointed.

That brings us to the Governor’s response to our report. In a highly unusual step, Adrian Orr issued a personal statement.

The Governor’s response shows the pressure he is feeling. Senior journalist Bernard Hickey reported this week that his reappointment is now in doubt.

It is thus understandable that Governor Orr felt the itch to respond to a paper co-authored by his predecessor at the RBNZ, Graeme Wheeler. Even when it might have been wiser for Orr to ignore it and let the media storm pass.

Still, our paper’s main focus was not even on the RBNZ but on the actions of the US Federal Reserve, the European Central Bank and the Bank of England. Though domestic media coverage may have suggested the primary target was the RBNZ, it was not.

The Governor’s highly personal statement and his (sort of) mea culpa for New Zealand’s inflation, illustrates how closely monetary policy decisions are linked to personalities. Perhaps too much, one might say.

Finally, the Minister of Finance and the Prime Minister accused us of “hindsight economics”. Prime Minister Jacinda Ardern said in Parliament’s questions that “there seems to be a lot of hindsight and revisionist history here.”

Well, not quite.

Back in August 2019, even before Covid, I co-authored an Initiative paper with Professor Robert MacCulloch and Dr Eric Crampton. Its title: The Unreserved Bank of New Zealand: Why unorthodox monetary policy needs boundaries.

We warned that quantitative easing, which the RBNZ had flagged then, would threaten price stability. We have published many columns since in which we criticised the RBNZ’s dovish stance and its distraction by other non-monetary objectives.

None of this was hindsight economics. It was foresight economics. More to the point, it was simple common sense.

Unfortunately, our warnings were ignored by the RBNZ and the Government. One result is the inflationary environment we are now in.

Another is taxpayers having to bail out the RBNZ for more than $8 billion of losses incurred under its money-printing programme.

All this underlines why our report this week was so important – both for our domestic debate and for central banking globally.

Chris Luxon, Chlöe Swarbrick and David Seymour are right to call for political consequences.

More importantly though, we need central banks globally to refocus on their core task: price stability.

Further reading and listening:
How central bank mistakes after 2019 led to inflation, by Graeme Wheeler and Bryce Wilkinson.

The Unreserved Bank of New Zealand: Why unorthodox monetary policy needs boundaries, by Eric Crampton, Oliver Hartwich and Robert MacCulloch.

Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE.


1 comment:

Anonymous said...

Excellent analysis and thanks and congratulations Oliver for the truth and reason. However still Adrian's Bank is pumping out more cash to banks and is running an OCR way below the high and rising inflation rate.