Saturday, October 22, 2022

Roger Partridge: Inflation lessons from Switzerland

This week’s third-quarter inflation figure from Statistics NZ underlines what a mess the Minister of Finance and the Reserve Bank have made of monetary policy.

Inflation may have peaked at 7.3%. But talk from Reserve Bank governor Adrian Orr late last month that the bank’s ‘tightening cycle was ‘very mature’ was at best premature. Tuesday’s announcement of Q3 inflation at 2.2% suggests inflationary expectations are now deeply embedded.

Most economists now predict inflation will remain well above the Reserve Bank’s 1-3% target for the foreseeable future. Kiwi households will endure a lot more pain before it is brought back under control.

Both Orr and Finance Minister Grant Robertson have been eager to place the blame for high inflation on external factors. And of course, pandemic-related supply chain bottlenecks, labour shortages and the war in Ukraine have put upward pressure on prices.

Yet, at 7.2% for the year to September 2022, New Zealand’s inflation is more than double Switzerland’s current inflation rate of just 3.2%. Meanwhile, Switzerland’s inflation is forecast to fall below 2% next year.

Part of the explanation for Switzerland’s low inflation is that its currency’s appreciation has acted as a buffer against rising import costs.

At the same time, New Zealand is not alone amongst OECD nations suffering from runaway prices.

But, like Switzerland, New Zealand has enjoyed far greater energy independence than many of the world’s worst-performing economies – especially in Europe. Hydro reserves have provided both countries with effective insurance against electricity price volatility.

Sadly, at least when it comes to inflation, that is where the similarities between New Zealand and Switzerland end.

The Swiss understand the importance of stable prices. Consequently, the Swiss National Bank’s independence is enshrined in Switzerland’s constitution. So too is the requirement for the SNB to give priority to price stability.

Meanwhile, as regular readers of this column will know, the Reserve Bank now has a hotch-potch of formal policy targets: price stability, maximum sustainable employment, and house prices. And then there are the Bank’s other contemporary areas of focus including inequality, climate change and Māori culture and language. These are all important topics, but distractions for a central bank.

From the mid-1970s, Kiwi households endured nearly two decades of inflation. Restoring price stability was a painful process, with mortgage interest rates peaking at over 20%.

History tells us that we are poor at learning lessons from history. But perhaps we can learn from Switzerland. The sooner the Reserve Bank’s remit – and focus – is narrowed the better.

Roger Partridge is chairman and a co-founder of The New Zealand Initiative and is a senior member of its research team. He led law firm Bell Gully as executive chairman from 2007 to 2014. This article was first published HERE.

1 comment:

DeeM said...

Like many of us Roger, you have fallen into the trap of assuming that controlling inflation and price stability are more important than "inequality, climate change and Māori culture and language" for the RNZ.

Under Orr and this woke government, they become a distant second priority. Relegated by the need to "save the planet" (yeah right) and right the wrongs of colonialism, by making a tiny proportion of part-Maori very rich and powerful in the process.

The Bank of England's just the same and look at the dire state the UK finds itself in.