Michael Reddell: Why is such rank dishonesty tolerated?

“We were one of the first central banks in the world to be tightening; we were one of the first central banks in the world to be easing”

Those were Adrian Orr’s words last Thursday to Parliament’s Finance and Expenditure Committee at their hearing on the Bank’s latest Monetary Policy Statement. He’d been asked by National MP Dan Bidois what the Bank was doing to learn from too slow tightening a few years back and, perhaps, too slow easing last year. Orr’s words above are at about 23.50 here.

Orr has run the “we were one of the first to tighten” lines repeatedly in the last few years, but I hadn’t heard the (even more preposterous) claim about being one of the first to ease before.

In various posts I’ve noted that his claim re tightening is simply false. But that point has often been buried in longer posts. So this post is devoted solely to those two factual claims.

I’ve focused here mainly on the central banks of OECD countries. There are 37 (more or less) advanced economy countries belonging to the OECD. But a fair number of those use a single currency (the euro), and one other (Denmark) pegs its exchange rate to the euro, and thus has monetary policy in effect set by the ECB.

That leaves 21 central banks responsible for setting monetary policy.

Of those central banks, two did not cut policy rates as Covid broke over the world in 2020 (Japan and Switzerland). So questions of reversing the Covid policy rate cuts didn’t arise there (and, for example, in Switzerland core inflation was to peak at just over 2 per cent).

The Reserve Bank of New Zealand’s first OCR increase, beginning to reverse the Covid easing, was on 6 October 2021. On the same day (but 12 hours or so later, given time zones) the central bank of Poland also put in place its first post-Covid tightening.

The following OECD countries had already increased policy rates by then

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So that was nine OECD central banks moving before the Reserve Bank did, and quite a range of countries too: Latin Americans (in the case of Chile, a longstanding inflation targeter), both old and new OECD European countries, and Turkey. Countries richer and more productive than us and countries poorer and less productive than us. You might be inclined to discount Turkey, as having had some really crazy monetary management in the last few years (and I’d probably agree) but it still leaves eight of 20 moving in advance of the Reserve Bank.

So that leaves 10 moving after the Reserve Bank (including the two central banks – Switzerland and Japan – that had never cut in the first place).

The Governor’s claim that the Reserve Bank was “one of the first in the world to tighten” is simply false. And when I looked around a few other (non-OECD) countries with floating exchange rates, and thus their own monetary policies, it wasn’t hard to find several of them that had also begun to tighten before the Reserve Bank (eg Brazil in Feb 2021, Uruguay and Paraguay in Aug 2021, and my old stamping ground Zambia in Feb 2021).

It is just made-up stuff. Said once it might have been pardonable – anyone can make mistakes, and a few Anglo-centric market commentators abroad had run similar lines (noting that the RBNZ had moved before peers in the UK, Canada, US, the euro-area, and Australia) – but when run repeatedly and shamelessly it is really inexcusable.

What about “we were one of the first central banks in the world to be easing”?

Well, that one doesn’t stack up either. The Reserve Bank’s first OCR cut was 14 August 2024.

Among OECD central banks, the following had already cut by then (the first five of them in 2023)

That’s 12 central banks (including the Bank of Canada, Bank of England, and the ECB)

Turkey had also cut early but that was getting into their really crazy period, so I’ll simply leave them out.

So of the 20 OECD central banks ex Turkey only 7 hadn’t cut by the time the Reserve Bank of New Zealand made its first cut in August.

You can believe the Governor, or the hard data (and all this is really easy to check).

As I’ve pointed more than once, the whole thing is absurd anyway. It isn’t as if every country faces the same pressures or inflation risks, so it isn’t as if there is some unconditional cross-country race to tighten or cut first.

But, as it happens, the Reserve Bank probably isn’t too keen on people digging even a little below the surface either. As I’ve noted previously, on IMF estimates New Zealand had the most overheated economy post-Covid of any advanced economy they do estimates for. That was on the Reserve Bank – monetary policy is supposed to be adjusted pre-emptively to minimise such overheats (and deep slumps) – and all else suggests they in fact should have one of the very first central banks to tighten. They weren’t.

On the Bank’s own estimates, they let an output gap of almost 4 percentage points (at peak) of GDP build up, so that excess demand enabled by them was a big part of the New Zealand inflation failure.

And, as just one illustration, consider the situation faced by the Bank of Canada and the Reserve Bank of New Zealand in late 2021 (I choose BoC mostly because they make their data readily accessible).

This BoC chart shows their estimates for the output gap at the end of 2021. At the time, they thought there was still a small negative output gap, and even now with the benefit of hindsight they think the output gap was about 1.2 per cent of GDP.

Click to view

What of the RBNZ? They thought at the time (November 2021 MPS) that the output gap was already slightly positive (having fallen back from mid-year estimates in excess of 2 per cent due to the fresh lockdowns) and they now estimate – again with the benefit of hindsight – that the output gap then was about 3 per cent of GDP. If the output gap was already positive there was no good justification for policy rates still being well below neutral. If the output gap was really highly positive, they had simply badly misread in real-time the inflation pressures in the economy (note also that the NZ unemployment rate by late 2021 was far below any estimates of NAIRU).

Very few central banks handled the last five years particularly well. The Reserve Bank of New Zealand was not among them. Possibly, on substance, it was not that much worse than the median of its peers (time will still tell on emerging on the other side successfully).

But what marks the Reserve Bank out is the repeated fabrications. The Governor just makes stuff up, running the same misleading or false stuff repeatedly, including to Parliament. And his (past and present) fellow MPC members – statutory officeholders all of them – let it pass (none of them speaks). As, it seems, do those charged with holding Orr to account, notably the Reserve Bank’s Board and the Minister of Finance (who last year reappointed the Board chair after the policy failures and outrageous attempts at misleading the public and Parliament of the Governor and MPC were already well known, and who has chosen not to fill vacancies on the Bank’s Board).

It is, sadly, an age when a US President can simply lie about who was responsible for invading Ukraine. We shouldn’t have to put up with such Trumpian debauched behaviour from anyone in New Zealand public life. But that is what we get from the Governor. It reflects poorly on all those who accommodate him. It reflects poorly on New Zealand. But most of all it reflects poorly on the Governor himself, who repeatedly shows himself just not fit to hold the office.

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.