Michael Reddell: More outright dishonesty from Orr

The Reserve Bank Governor has given an interview to TVNZ’s Katie Bradford, apparently done under the aegis of the Q&A show but too late in the year to actually be broadcast on Q&A itself or to be done by Jack Tame, Q&A’s regular and most demanding interviewer.

There is a TVNZ article reporting the interview here, and you can find the full thing (only about 13 minutes) somewhere on TVNZ+ (my son found it for me). [UPDATE: Apparently that was only half the interview and the full 26 minutes is on the Q&A Youtube account.]

What is reported in the article is pretty breathtaking, with Orr reported as standing by his (or, presumably, the MPC’s) decisions during and since Covid with no apparent regrets, and then moving on to attack the public and the media for being focused on housing and house prices. We – and he – might regret the fact that we do not have a well-functioning land supply/use policy regime, but we don’t, and haven’t done so for decades, so it should hardly be a surprise (or a cause for attack/lament) that when interest rates are cut in what proves to be an overheating economy house prices go up.

But it got a whole lot worse when I listened to the full interview itself, where Orr seemed to just play on the fact that his interviewer wasn’t a specialist (with all the facts at her finger tips) to simply run claims that he knows not to be true. It was a reprise of his form earlier in this cycle when he repeatedly and deliberately misled Parliament’s FEC (but so supine are our democratic institutions that there were no consequences for what Parliament’s website solemnly assures us is a serious offence).

Orr was asked whether the Bank had been too slow to raise rates (of course it was, as the Bank has even grudgingly acknowledged in the past). His response was to claim that the Reserve Bank of New Zealand was the 2nd or 3rd central bank to raise rates in 2021. It simply wasn’t so. Even among OECD economies – and there are only about 20 separate monetary policy areas in it (much of the OECD having just the euro) – the Reserve Bank was the 8th (equal) to move (those moving ahead of us were Iceland, Norway, South Korea, Mexico, Chile, Czech Republic, Hungary). Perhaps as importantly, the issue should never be about who went first or second, but whether a particular national authority moved sufficiently early and aggressively for the circumstances their own economy faced. On IMF estimates, New Zealand had the most overheated economy of any of the advanced country monetary areas it does the numbers for (a group which doesn’t include all those in the list above, but does include the US, UK, Canada, Australia, Japan).

Orr then went to the claim that the Bank had been “lauded internationally – although not domestically” for being one of the most responsive central banks. It is certainly true that some market commentators have run such a line, but almost all of them seem to have had in mind the big countries and the Anglo countries, not the wider group of OECD economies. The Reserve Bank certainly wasn’t the slowest to move, but then it was dealing with a really badly overheated economy and should have moved a lot earlier. Their mistakes weren’t unique – misreading economies and pandemic macroeconomics was a common mistake, among central banks and private commentators – but they voluntarily took on the power and responsibility in New Zealand, and they actually made the bad policy calls, including increasing rates too late and initially far too sluggishly. Other people can hold their central banks to account.

(And, of course, the MPC also lost $11 billion or so or taxpayers’ money punting in the bond market. TVNZ didn’t ask about that particular bad call so we were spared a repeat of Orr’s blustering attempts to defend that. Puts the cost of running an RNZN vessel straight onto a reef not realising the autopilot was still on in some perspective….)

And then Orr claimed that the Reserve Bank was one of the few central banks confidently reducing policy rates. Which was a bit odd when most advanced country central banks have been reducing policy rates in recent months (obvious exceptions being Australia and Japan). But don’t let the facts get in the way of the Governor’s spin.

He had the gall to round off that section of the interview by suggesting, rather patronisingly, to Bradford that “your potted history is kind of incorrect”. Dear, oh dear. This from a very senior and powerful public official. Is this the sort of thing the Minister of Finance expects/tolerates? (Well, on the evidence so far anything goes.)

Bradford moved on. As was accepted, had it not been for the Covid outbreak in Auckland, the Bank would have started tightening at the August 2021 MPS (they actually started at the next review). So Bradford took a look at the projections in that Monetary Policy Statement. She pointed out (correctly) that in those projections, annual inflation was expected to be back down to 2.2 per cent by the year to September 2022 (with, as it happens, very little monetary policy help at all: as everyone agrees, there are long lags, and by the end of 2021 the OCR was expected to be only 0.75 per cent). I guess her point (obviously correct) is that the Bank was still badly misreading things by that point (and of course even now annual core inflation is still somewhere between 2.5 and 3 per cent, having required an OCR at 5.5 per cent to bring that about).

But Orr wasn’t going to be bothered engaging with facts. Instead, we got the same old outrageous claims he used to try to fob Parliament off with. “Do you know what happened after that [August 2021]”, he asked. “We had the Ukraine invasion, rising food prices”, going on to add in cyclone effects and so on. He even had the gall to suggest that we had among the lowest inflation rate peaks in the OECD and that European countries had been dealing with 20 per cent inflation. It is an outrageous attempt to mislead and distract, simply breathtakingly dishonest, and especially so when set against any discussion of core inflation or the economic overheating. Take the New Zealand labour market for example: the unemployment reached its lowest level (extremely overheated) in the December quarter of 2021 (ie before the invasion), oil price pressures from the invasion never lasted long, and…..as importantly….both food and energy prices are typically “looked through” by central bank policymakers focusing on core inflation. On CPI ex food and energy measures, New Zealand’s peak was about middle of the pack among OECD countries (and the extreme headline numbers in a few countries were largely the result of the gas price shock to which New Zealand – no pipeline or LNG trade – was not exposed).
Click to view

As for cyclone effects on inflation, one of his own managers contradicted Orr in front of FEC last year, to confirm that any effect was actually very small.

Orr then moved on to an interesting claim (that I have not heard him make before, and which has not been documented in any published papers or material in MPSs) claiming a) that to have kept core inflation in the 1-3 per cent range the OCR would have to have been raised to 7 per cent on the first day of the pandemic, and b) that even if that had been done we’d still have had 6 per cent headline inflation. Neither result seems very likely, and given Orr’s record of just making stuff up should be heavily discounted unless/until they produce some robust formal estimates. On Orr’s telling it would have taken more monetary restraint to stop inflation getting away than it actually took to bring it down again once it had gotten away. That doesn’t seem very likely, and perhaps a useful counterpoint is the experience of Japan and Switzerland which didn’t cut policy rates into the pandemic, and didn’t see a particularly severe later inflation experience. As for the 6 per cent claim, that seems simply preposterous, since there has been no time in the last few years when the gap between headline and core inflation has been anything like as large as 3 percentage points.

Later in the interview, questioning moved on to fiscal policy. Here I will give Orr credit on one point: he explicitly corrected the journalist to note that the current goverment had certainly cut spending, but that it had also cut taxes, and that the two effects were roughly even. This is exactly consistent with the estimates in Treasury’s cyclically-adjusted balance series (chart in Monday’s post), in which this year’s deficit is just a touch larger than last year’s. Of course, it would have been nice had the Bank made this point in its MPSs, instead of spending the last 18 months – both governments – avoiding the issue and focusing on largely irrelevant series of government consumption and investment spending (rather than the cylically-relevant) fiscal balance and fiscal impulse measures.

For the rest of it, Orr was back in his preferred space, playing politician and advancing personal political and ideological agendas that are simply out his bailiwick. It was, we were told, critical for governments around the world to close infrastructure deficits and New Zealand’s was “one of the worst”. He appeared to attack a focus on reducing deficits and keep government debt in check, suggesting that the government needed to spend “a lot more” on infrastructure, suggesting that New Zealand had been failing in this area since World War Two (a claim that of course went unexamined – in fairness no time – but presumably includes overbuilt hydro power capacity, sealed roads in the middle of nowhere etc). Now, in fairness, he did also talk about enabling private capital – this the same Governor who only a few months ago was bagging foreign investment – but the overwhelming tone was to welcome more public debt. Waxing eloquent he launched into Labour Party and left wing themes about how great it would be if governments were investing and delivering more “social cohesion” (around whose values Governor?), an “inclusive economy” and so on.

In any sane environment it would have been to have significantly overstepped the mark, but Orr has done that so often – and worse, with all the misrepresentations and denials – with no consequences (no rebuke from the Board or minister(s), reappointment for a final term comfortably secured, tame board chair reappointed etc) that no doubt it will again pass with little notice.

It really was a pretty disgraceful, if again revealing, performance. But then the fact that Orr still holds office, and the incoming government – that used to rail against him and his style and the corporate bloat – has been content to see things just run on as usual, is just another sad reflection of the debased state of New Zealand public life and standards. One of many to be sure, but no less acceptable for that.

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.