First, some kudos. With the speech on the Reserve Bank website there was a transcript of the following Q&A session (the speech was apparently delivered as a webinar). That should be standard practice, since the unscripted remarks of policymakers can be at least as informative as the scripted and carefully negotiated ones are, and we know central bankers can go off reservation. I’d link to the transcript but can’t now find it again (no doubt there somewhere, but not on their speeches page).
The speech seemed to mainly be an opportunity to report some recent research results from Reserve Bank staff (several Analytical Notes). It is good to see some of those coming out (in a telling comment on how bad things had been, in the Q&A session Conway himself highlights that it was good that they are now “really cranking out” research again).
Conway wasn’t at the Reserve Bank when the big and really costly mistakes were made by the Monetary Policy Committee, joining only in May 2022. One might therefore have hoped that he’d be able to take a more detached and objective view on what had gone before. After all, even though in his management role he works for the Governor (and his grossly underqualified direct boss, the DCE responsible for macroeconomics and monetary policy, with a marketing degree), he does actually hold a statutory position as a member of the Monetary Policy Committee, and isn’t supposed to simply defer to the boss (or institutional interests) in reaching his views and votes.
Conway’s speech is presented as forward-looking in nature (“the road back to 2%), but there is quite a lot of history in it too, and it is the historical dimensions that got my goat. In particular, there is a persistent and repeated refusal to accept (at least in public, which is where it counts in terms of accountability) that monetary policy mistakes and misjudgments are primarily responsible for the severe inflation outbreak, the aftermath of which we are still living with. All the arbitrary and never-to-be-reversed redistributions of wealth, all the dislocations of markets and businesses, and now the recession and significant rise in unemployment which the Bank, no doubt rightly, tells us is necessary to get inflation comfortably back down again.
To repeat one of my consistent lines, human beings are fallible, they make mistakes. Central banks – here and abroad – are made up of humans, so they make mistakes. Really serious ones, of the sort seen in the last few years, shouldn’t happen but they do. One might even offer perspectives in mitigation: the pandemic was something quite extraordinary, and many people (here and abroad) misread the macroeconomics of it for too long. But those responsible need to take responsibility for the mistakes that were made. Those who now hold office who weren’t even there at the time have even less justification for not detachedly owning that those who were there made (really serious and costly) mistakes. Plus, in most human affairs, contrition goes quite a long way…..including (but not limited to) as a sign that one is even interested in learning from the mistakes and doing less badly next time.
Instead, there is avoidance and minimisation right through the speech.
At one point we are told that during the Covid period interest rates were “relatively low”. Not the lowest they had ever been, just “relatively low”.
Then we get attempts to minimise Reserve Bank responsibility by highlighting (correctly) that fiscal policy was also expansionary (“at upper end across OECD economies”) and bemoaning that insufficient attention has been paid to the role of fiscal policy. But Conway knows very well that the system is set up in such a way that monetary policy is the last mover: fiscal authorities do what they will, do it transparently, and then the Reserve Bank does whatever is necessary to keep inflation in check. The responsibility for the high (core) inflation rests with the Reserve Bank, not with fiscal policy.
And so it goes on. Several times we find attempts to blame the labour market, or even border closures, as if the Reserve Bank MPC was not set up to be….the last mover, to respond to all other pressures and risks in a way that keeps core inflation in check. In the Conclusion, Conway articulates it this way
“Inflation spiked higher during the pandemic due to a range of factors, with a shortage of labour and materials in a period of strong demand being particularly important”.
But no mention of monetary policy, which is by design the main tool for influencing aggregate demand and capacity pressures to keep inflation at or near target. There are plenty of references to “demand” in the speech, but hardly any (backward looking) to the demand manager.
To read Conway in isolation, you would have absolutely no idea that the Reserve Bank itself now estimates that the economy got materially more badly overheated than at any time for decades. That is on them: minimising or avoiding such situations is an integral part of successful inflation targeting.
The speech seemed to mainly be an opportunity to report some recent research results from Reserve Bank staff (several Analytical Notes). It is good to see some of those coming out (in a telling comment on how bad things had been, in the Q&A session Conway himself highlights that it was good that they are now “really cranking out” research again).
Conway wasn’t at the Reserve Bank when the big and really costly mistakes were made by the Monetary Policy Committee, joining only in May 2022. One might therefore have hoped that he’d be able to take a more detached and objective view on what had gone before. After all, even though in his management role he works for the Governor (and his grossly underqualified direct boss, the DCE responsible for macroeconomics and monetary policy, with a marketing degree), he does actually hold a statutory position as a member of the Monetary Policy Committee, and isn’t supposed to simply defer to the boss (or institutional interests) in reaching his views and votes.
Conway’s speech is presented as forward-looking in nature (“the road back to 2%), but there is quite a lot of history in it too, and it is the historical dimensions that got my goat. In particular, there is a persistent and repeated refusal to accept (at least in public, which is where it counts in terms of accountability) that monetary policy mistakes and misjudgments are primarily responsible for the severe inflation outbreak, the aftermath of which we are still living with. All the arbitrary and never-to-be-reversed redistributions of wealth, all the dislocations of markets and businesses, and now the recession and significant rise in unemployment which the Bank, no doubt rightly, tells us is necessary to get inflation comfortably back down again.
To repeat one of my consistent lines, human beings are fallible, they make mistakes. Central banks – here and abroad – are made up of humans, so they make mistakes. Really serious ones, of the sort seen in the last few years, shouldn’t happen but they do. One might even offer perspectives in mitigation: the pandemic was something quite extraordinary, and many people (here and abroad) misread the macroeconomics of it for too long. But those responsible need to take responsibility for the mistakes that were made. Those who now hold office who weren’t even there at the time have even less justification for not detachedly owning that those who were there made (really serious and costly) mistakes. Plus, in most human affairs, contrition goes quite a long way…..including (but not limited to) as a sign that one is even interested in learning from the mistakes and doing less badly next time.
Instead, there is avoidance and minimisation right through the speech.
At one point we are told that during the Covid period interest rates were “relatively low”. Not the lowest they had ever been, just “relatively low”.
Then we get attempts to minimise Reserve Bank responsibility by highlighting (correctly) that fiscal policy was also expansionary (“at upper end across OECD economies”) and bemoaning that insufficient attention has been paid to the role of fiscal policy. But Conway knows very well that the system is set up in such a way that monetary policy is the last mover: fiscal authorities do what they will, do it transparently, and then the Reserve Bank does whatever is necessary to keep inflation in check. The responsibility for the high (core) inflation rests with the Reserve Bank, not with fiscal policy.
And so it goes on. Several times we find attempts to blame the labour market, or even border closures, as if the Reserve Bank MPC was not set up to be….the last mover, to respond to all other pressures and risks in a way that keeps core inflation in check. In the Conclusion, Conway articulates it this way
“Inflation spiked higher during the pandemic due to a range of factors, with a shortage of labour and materials in a period of strong demand being particularly important”.
But no mention of monetary policy, which is by design the main tool for influencing aggregate demand and capacity pressures to keep inflation at or near target. There are plenty of references to “demand” in the speech, but hardly any (backward looking) to the demand manager.
To read Conway in isolation, you would have absolutely no idea that the Reserve Bank itself now estimates that the economy got materially more badly overheated than at any time for decades. That is on them: minimising or avoiding such situations is an integral part of successful inflation targeting.
Click to view
Or that on IMF estimates New Zealand in 2022 had the most overheated economy of any of the advanced countries/monetary areas. It was the result of what were, with hindsight, glaring monetary policy mistakes and misjudgments. But Conway – and no doubt his bosses – would simply prefer we looked the other way, and accepted that it was all somehow out of their control (except no doubt when they will take credit when inflation eventually comes down again).
What of the way ahead? There is an OCR review out tomorrow, continuing the weird RB choice to hold a review the week before the key (especially at present) quarterly CPI data are out. The Bank has signalled that Conway, their chief economist, is away and won’t be attending the meeting (which doesn’t seem like particularly good leave planning). Given that and the weirdly hawkish tone of the May MPS – the one picking an economic recovery even as the OCR is unchanged, or even rise, for the next year – one can’t expect much from the MPC tomorrow (although RB communications flip-flops haven’t been unknown).
I’m less interested in what they will do than in what they should do, and have come to believe that, on balance, an OCR cut would be appropriate. These are – or should be – almost always matters where risk and uncertainty are real considerations. If a monetary policymaker is 100% sure of their stance, they either aren’t thinking hard enough or have left things far too late, given the fairly long lags with which monetary policy works. I’m certainly not mounting an argument for a move to a neutral monetary policy stance – wherever the neutral nominal interest rate might currently be (itself highly uncertain) – but simply for taking the foot a little off the brake, and easing back a little on the extent of the disinflationary pressure. As I said, uncertainty is a pervasive factor in any forecast-based monetary policy regime. Quite possibly, time will show that by now the OCR should already be quite a bit lower, but I don’t think that is yet a view one could reach with great confidence, so mine is simply a call to begin edging in that direction (and to reverse May’s curious hawkish rhetoric and numbers).
Why? Annual inflation is still above the top of the target range after all. But it is clearly falling, and there are numerous indicators – hard data and surveys – pointing in the direction of a further material accumulation of excess capacity and disinflationary pressure, which will play out – even just on today’s policy – over the next 12-18 months. The worst of inflation is clearly past, and with it fears that some new and really bad rate of inflation was going to become embedded. And while the RB likes to talk up non-tradables inflation – which has no special role in the Remit – it is also true that a fair proportion of those pressures (insurance and rates) are resulting from non-monetary shocks (one clearly a supply shock, one about government charges), which really should be “looked through” by an inflation targeting central bank, unless (and to the extent that) they were spilling into public expectations of medium term inflation and wider price-setting and spending behaviour.
A move now to a 5.25 per cent OCR would not, of course, be game-changing in macroeconomic terms. It would, however, be a step in the right direction. One can understand the personal incentives on the Governor – who cares about the excess capacity so long as I finally am 100% sure inflation is back down again – but perhaps it would be easier for him and the MPC to take some of the risk, that is an integral part of the business they are in, if they hadn’t spent so much time and effort blustering and minimising the extent of their own mistakes from several years back.
Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.
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