One of our Blog readers, a top notch Wellington economist called Matthew Williamson, who I trust doesn't mind me writing his name, has commented on yesterday's provocative Blog in which we argued the RBNZ was not sticking to its new mandate. That mandate, laid down by the Finance Minister this past year, requires the Bank to focus solely on ensuring inflation is around 2% (i.e., the mid-point of its 1-3% range). Since inflation is already there, we asked the question: what is the Bank up to with its rate cuts? My suspicion is that its panicking over how the economy is in a stagnant state and is desperate to get it growing again (which is not in its mandate). Matthew's comment is:
"You refer to the OCR being at the midpoint of the target band, and therefore say the RBNZ should not cut the OCR, as it is clear they are doing so to stimulate the economy. But isn’t the issue with this that the OCR needs to be forward looking? It takes 1.5 – 2 years for any cuts or increases to work their way through the system. Does the NZ economy of 1.5 – 2 years from now need stimulus? The OCR is currently still above the RBNZ’s estimates of the neutral rate. While admittedly I haven’t had time to read yesterday’s MPS yet, the bank did discuss deflationary downside risks in their previous MPS. A sluggish economy with high unemployment in the context of surprisingly stable and fairly low oil prices does not a recipe for inflation make".
Its a great argument - Matthew has outlined exactly how the RBNZ would defend its 50 point basis point rate cut this week. It would say that, should the OCR rate have been held at 4.75%, then that's above the "neutral rate" (at which inflation is neither rising or falling). So it needs to cut further to ensure inflation doesn't fall beneath its 2% target, especially on the back of a forecast sluggish economy, which may cause inflation to fall even more.
My view is that Matthew's correct - but its not the full story. The other half of the story is that a cover-up is in play & the RBNZ is bamboozling Ministers and public with quasi-scientific arguments that introduce complicated concepts like "neutral rates", which Parliament's Finance & Expenditure Committee don't have much clue about. The past four years have seen the RBNZ erratically swing like a caged monkey. First, it wildly slashed rates close to 0 and did a $50 billion cash printing program during Covid, fanning inflation and driving an out-of-control bubble in the NZ property market (at its height, average prices in Wellington hit $1 million). That took Governor Orr off-guard (he told Bloomberg no such risk existed because its "a different world now") to the extent he panicked again & hiked rates through the roof to "engineer a recession". He did way more than that - he engineered 3 recessions and created mortgage distress & bankruptcies up & down the country. Now he's in another state of shell-shock, desperately trying to kick-start the economy which has become one of the slowest growing in the whole world. Truth be told, Orr doesn't much care about inflation now - its already under control - what he cares about is getting the economy growing so people don't loathe him so much. So, in my view, yes he would defend his actions in the elegant scientific way Matthew beautifully outlined, but its only part of the truth behind the shambles that has become Monetary Policy in NZ.