Let me defend my view as being not remotely out-of-line. First, NZ's trend economic growth rate is now very low - we're experiencing "secular stagnation" that has been going on for several years. Its not a temporary dip in the business cycle with a strong underlying trend. Even the PM & Finance Minister agree productivity growth has almost ground to a halt. Our young talent pool is leaving in record numbers. The PM says to stop it, NZ must increase wages. But people also value status, not just money. And the high status jobs have all been given away to well-connected mates of National & Labour. Otago's Vice Chancellorship should have gone to one of our top research scholars who has become a big name on the world stage, of which there are a surprising number - but no, it goes to Disgraced Former Finance Minister Robertson. This week, NZ First Leader Peters announced 70 year old Heather Simpson, who was Helen Clark's Chief of Staff, has been appointed as Director of Ferry Holdings, in charge of buying new Cook Strait Ferries. She advised Labour on how to lock-down NZ's borders even tighter during Covid and was behind the disastrous creation of Health NZ that wrecked health-care. She joins 76 year old Sir Peter Gluckman advising Judith Collins how to restructure science and get NZ into the likes of AI, which he barely knows a thing about, and 70 year old Management Lecturer Lester Levy, who's in charge of single-handedly revamping our health system. But the problem is not management, it is the socialized model of single payer / single provider that is falling apart, both here and the UK. Not that I'm ageist - I'm also getting on - but these are terrible appointments.
Such issues mean getting NZ's economy growing can only be solved by supply-side policies that increase productive capacity, enhance incentives and end jobs for National & Labour Party boys & girls, not RBNZ sugar hits. There's also upward pressure on the neutral rate of interest due to the government's huge fiscal cash deficit of $20 billion, about 4-5% of GDP. What's more, the Reserve Bank of Australia said yesterday it doesn't want to cut its cash rate below 4% for fear of igniting inflation. Former US Treasury Secretary Summers argues that its "neutral rate is more likely above 4%". Kiwi real interest rates have been higher for decades than American ones, and most of the OECD.
So my conclusion is that the RBNZ is in panic mode. Although the new Reserve Bank Act says it has a single mandate of price stability (it used to be a dual mandate giving it powers to keep employment high, at least in the short run) the Bank is desperate to get people borrowing & spending again. I have a suspicion the RBNZ may only cut by 25 basis points today, not 50 points as the market expects, since it may be nervous about being made to look even more out-of-control and reckless by the likes of DownToEarth.Kiwi. Who knows? When you're dealing with an outfit stacked full of dubious hires, and a Senior Leadership Team that has barely studied economics, you never know what it will do next.
Such issues mean getting NZ's economy growing can only be solved by supply-side policies that increase productive capacity, enhance incentives and end jobs for National & Labour Party boys & girls, not RBNZ sugar hits. There's also upward pressure on the neutral rate of interest due to the government's huge fiscal cash deficit of $20 billion, about 4-5% of GDP. What's more, the Reserve Bank of Australia said yesterday it doesn't want to cut its cash rate below 4% for fear of igniting inflation. Former US Treasury Secretary Summers argues that its "neutral rate is more likely above 4%". Kiwi real interest rates have been higher for decades than American ones, and most of the OECD.
So my conclusion is that the RBNZ is in panic mode. Although the new Reserve Bank Act says it has a single mandate of price stability (it used to be a dual mandate giving it powers to keep employment high, at least in the short run) the Bank is desperate to get people borrowing & spending again. I have a suspicion the RBNZ may only cut by 25 basis points today, not 50 points as the market expects, since it may be nervous about being made to look even more out-of-control and reckless by the likes of DownToEarth.Kiwi. Who knows? When you're dealing with an outfit stacked full of dubious hires, and a Senior Leadership Team that has barely studied economics, you never know what it will do next.
Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.
3 comments:
It's not the age it's the trotting out of the same old faces .
Once debt expansion begins, and this is a direct effect of central bank monetary policy-specifically, artificially suppressed rates and therefore currency devaluation always creates an inherent lag effect of varying lengths. The length of the “lag effect” as to when inflation will hit is grossly dependent on Money Velocity (MV).
Immediate action is needed now due to the lag effect. The last thing we need is lower rates. We need much high rates, because if action is not taken immediately, what is about to happen here and throughout the west regarding inflation, will make what happened last time in the 1970’s look like a walk in the park. Even when Volcker raised rates in 1979, the effect of higher rates took time to take effect… we will have the same situation here.
Australia goes from 4.35% to 4.1%, NZ from 4.25% to 3.75%. And Australia signalling no further cuts in the near future. Who is right? Orr's track record gives little cause for confidence that he is.
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