There was the Governor of course, but in the last couple of days we’ve also heard from Deputy Governor Christian Hawkesby, and from the deputy chief executive responsible for macroeconomics and monetary policy, Karen Silk. Whether these MPC members, really highly-paid senior officials, actually believed what they were saying when they said it (most likely) or were deliberately setting out to deceive, it really isn’t good enough.
As regards Hawkesby, interest.co.nz’s Dan Brunskill captured in this Twitter thread and the article he links to there.
Click to view
As regards Hawkesby, interest.co.nz’s Dan Brunskill captured in this Twitter thread and the article he links to there.
Click to view
And then there was Silk. In almost any other advanced country central bank, the holder of a position like her’s would be a highly-regarded economist who, if one didn’t always agree, could at least be counted on to be on top of the facts. Not so Silk, on either count.
She gave an interview to NBR and someone sent me a link to the article. It included these lines, attempting to explain the shift of view
That highlighted bit didn’t sound right, but…….she is the highly-paid statutory officeholder. So I thought I should look up the Bank’s own numbers.
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The May MPS was finalised in the middle of the June quarter. In that set of forecasts their best guess was that the output gap had been negative in the March quarter, and was substantially negative in the June quarter. In fact, since May they’ve become less optimistic on when the crossover (to negative output gap) occurred, and for the first half of 2024 as a whole there is no material difference in the output gap view. It is really pretty basic stuff that commentators shouldn’t have to go round fact-checking, as if it was a politician on the campaign trail they were dealing with. (And yes, the Reserve Bank has become more pessimistic – larger negative output gaps – for Q3 and Q4, which is a point she could legitimately have made, but wasn’t (at all) the one she actually tried to put over.)
But digging into my table of old output gap estimate prompted me to look again at how they’d evolved, and when the Bank first estimated that the economy was really quite badly overheated (ie published a real-time estimate of a big positive output gap). They now reckon the output gap peaked in the September quarter of 2022 at about 4.5 per cent of GDP. That’s a dreadful reflection, but it is also an estimate with the benefit of hindsight.
What counts as “big”? If we look back to the 00s – and by 2007 there wasn’t much doubt that the economy was really overheated – the Reserve Bank now estimates a peak positive output gap then a 2.8% (of potential GDP).
As early as the November 2021 MPS, the Bank estimated that in the June quarter of 2021 the output gap had reached 2.6 per cent of GDP. Now, things got messed up by the lockdowns in the second half of 2021, but even in November 2021 the Bank thought the output gap would be back up to 2 per cent by the following quarter (March 2022).
Perhaps more strikingly, by the May 2022 MPS, the Reserve Bank estimated that the output gap for the quarter they were actually in was 2.7 per cent of GDP. As time passes it is so easy to lose sight of what happened when, but the May 2022 MPS was the one in which the Bank raised the OCR to the giddy heights of 2 per cent, pretty much bang on the midpoint estimate of the neutral nominal OCR (as published in that same MPS). Why would you (MPC) consider it appropriate to have the OCR only at neutral when the economy was already, on your own estimates, badly overheated? As an independent check on overheating, the unemployment rate for the March quarter (which the MPC had when they made their decision) was a multi-decade low of 3.2 per cent.
Now, it is certainly fair to note that the May 2022 MPS included a projected track of further OCR increases over the following year to a peak of around 3.9 per cent. But – as we’ve just seen again since May – forward tracks are to a considerable extent vapourware; the hard decision was the OCR decision made that day by that committee (which incidentally included both Silk and Hawkesby, and the then new chief economist Paul Conway).
It is easy to look back and criticise historical forecasts that turn out to be quite wrong. But that isn’t my point here. On the Reserve Bank’s own forecasts and estimates – of two unobservable variables (neutral interest rates and output gaps), but ones that play a significant part in the Bank’s rhetorical framing – things were badly overheated and yet the OCR had barely got to neutral. And it wasn’t as if there was no inflation evident: in May 2022 the latest estimate from the Bank’s own slow-moving sectoral factor model measure of core inflation was already at 4.2 per cent (later revised a bit further up), miles above the top of the target range, let alone the target midpoint that the MPC was supposed to have been focused on.
There really isn’t much excuse. On estimates the Bank had in front of them – and was willing to publish – the inflation drama could by now have been over a year ago had they adopted an OCR that their own forecasts/estimates pointed to. But the MPC chose not to (just as, for some weird reason, they kept on pumping out modestly-subsidised (so-called) Funding for Lending loans to banks – a Covid support measure, designed when the concern was deflationary risks – for many months more. Remarkably, there are still $15 billion of these loans outstanding.
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The MPC’s stewardship of monetary policy in the last few years has been pretty consistently bad. If you might reasonably make allowances for 2020 – it was a very unusual event and set of circumstances and almost everyone found it hard to read (but the MPC is paid to be more expert than most) – nothing really justifies the delayed start to OCR hikes, or the sluggish response even at a point (mid 2022) when the Reserve Bank itself told us the economy was grossly overheated and core inflation was already well outside the target range. Against that backdrop, one can mount a reasonable case that this year’s policy flip-flop doesn’t matter hugely in macroeconomic terms. But it shouldn’t have happened – its view in May was not only clearly wrong, but it was clearly an outlier (views of other economists don’t provide them much cover – and when it did, we shouldn’t have to put with supposedly expert powerful officials just making up lines, apparently indifferent to the facts. Nor, of course, with a Governor who treats both facts and MPs (at FEC, the committee charged with scrutiny of the Bank) with such disdain whenever challenged.
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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