Saturday, March 18, 2023

Bryce Wilkinson: The mess the government has made of the monetary policy, and the task ahead

Inflation is a problem for the first time in 30 years. Property prices have whiplashed. The Reserve Bank of New Zealand (RBNZ) has cost taxpayers $9 billion, for no clear net benefit.

What underlies this mess? This week the New Zealand Initiative published my report addressing that question.

At the start, I thought that responsibility for these developments lay mainly with the Governor. Along the way, I found that the Minister of Finance had played a more directive role than I had thought.

Concerning the Governor, the smoking gun behind the current breakout in inflation is the failure of the Bank’s experts and models to forecast the rise in inflation. Inflation was unintentional.

A serious effort to improve the Bank’s forecasting models should be a priority, but I have not seen evidence of that.

Indeed, the Bank’s employment priorities have been elsewhere. Whereas staff numbers in the Reserve Bank of Australia (RBA) rose a mere four percent between 2017 and 2022, the rise in the RBNZ was 80 percent. Yet, the number of the RBNZ’s “economics” staff in 2022 was less than in 2013.

The report documents the Governor’s advocacy position on controversial and distracting political issues such as climate change and ethnicity.

Another concern is how underpowered the RBNZ is at the top levels and on the critical Monetary Policy Committee, compared, for example, to the RBA.

However, documents released under the OIA show that the Minister of Finance had instructed the Bank to hire based on gender, with no mention of merit. He has also reaffirmed the bizarre policy of not appointing external monetary policy researchers to the key Monetary Policy Committee. And he had taxpayers underwrite the gamble that lost $9 billion.

The government further undermined the focus of monetary policy by introducing contending considerations—maximum sustainable employment and “more sustainable” house prices.

The Minister has also blithely required the RBNZ to use monetary policy to “promote the prosperity and wellbeing of New Zealanders … “. Such open-ended instructions invite presumption and distraction.

The only thing monetary policy can reliably control is medium-term inflation. That needs a tight focus.

The bottom line is that the next Minister of Finance faces a big task to turn things around.

[The report, “Made by Government: New Zealand’s Monetary Mess”, can be accessed here]

Dr Bryce Wilkinson is a Senior Fellow at The New Zealand Initiative, Director of Capital Economics, and former Director of the New Zealand Treasury. His articles can be seen HERE.


Anonymous said...

Pretty much reflects the current Govt on all fronts. Totally out of their depth in many areas. And what do you do if you have no clue?
Employ people who have even less of a clue and make them report to you.
The whole lot should be fired and start again, including the public service.

Robert Arthur said...

It seems absurd that despite the colossal wage bills the output of our govt financial managers seems so wanting. The problem seems to be staff are too youthful to remember or study the past so that the likes of the 1929 shares crash, wartime and 1970s inflation, 1987 crash, very direct link of house prices with loan availability, disposable income etc, are largely beyond imagination. Any secondary school economics student could see that the money printing for Covid was going to be inflationary. Our extensive indexing is going to make it near impossible to control, and ceratinly not with an election looming.. The nation has to take some setbacks on the chin, not just selected members. Incredibly, whilst others suffer engineered loss of savings worth, business, jobs, homes and hope, non contributing beneficiaries are fully protected, indexed to the best developments and secure in state houses.

Basil Walker said...

Is the New Zealnd Reserve Bank independent or a government controlled ministry? . Is the RBNZ a direct part of the Minister of Finance portfolio. Why then is there a difference between Hon Stuart Nash "chewing the fat" with the Police Commisionar and the Minister of Finance directing the RBNZ governor to lose $9billion tax payers hard earned dollars. Both Hon Grant Robertson and Mr Adrian Orr should be dismissed forthwith.

Anonymous said...

Thank you Bryce, I will have to study your linked report in some detail, but it's clear to all that the RBNZ has had its eye off the ball for sometime, and those employment stats truly speak volumes. Orr has been under the spotlight for the financial loss and inflation issues, but I don't recall him being brought to account for this employment fiasco. In all, to have renewed his tenure for another five years just underscores the incompetence of this Government.