When you have the wrong Board Chair and wrong Governor of a Central Bank, who aren't up with state-of-art thinking about how interest rates should be set, its a recipe for throwing an economy into chaos. And so it is with NZ and our Reserve Bank. Last month the Bank cut the Official Cash Rate by 50 basis points. "Members [of the Monetary Policy Committee] agreed that an OCR of 4.75 percent is still restrictive". In common language, that means you're still being bankrupted by your mortgage costs, all for the cause of further crushing inflation. The Bank stated in its October Summary Meeting Record, "Members are confident inflation is converging to target". The Meeting keeps repeating the word "converging", over and over again: "The Committee assesses that annual consumer price inflation is within its 1 to 3 percent inflation target range and converging on the 2 percent midpoint".
These lines are in formal breach of the Reserve Bank's Remit, and hence the legal authority under which the Bank is bound to act. What does its Remit say? It says that annual inflation should be kept "between 1 and 3 percent over the medium term, with a focus on keeping future inflation near the 2 per cent midpoint", as signed by Finance Minister Willis. Note the word "near", not "at". You may think this Blog is about to make a small point, but you will be surprised. According to the author of the world's most popular text-book in economics and former Chair of the US President's Council of Economic Advisers, Greg Mankiw, its a very important point. So much so, that its behind the crushing of the Kiwi economy. What's the reasoning? Inflation in NZ is 2.2% and the Governor and his Monetary Policy committee have declared they've not yet achieved their target - only that "inflation is converging" to it - but we aren't there right now. In their view, NZ is still missing it by 0.2% (= 2.2% - 2.0%). That's what "converging" means. But what does the Remit (and law) say? It certainly does not say the Bank has to converge to a 2.0% inflation rate, only get "near" to 2%.
The Reserve Bank's way of thinking, aside from being illegal, is damaging our economy due to its effect on interest rates. Ask people drowning under mortgage stress. A few months ago, Mr. Mankiw penned an influential article (below) stating," I feel strongly that a target of 2% is superior to a target of 2.0%. The difference between these targets, of course, is the number of significant digits. If you recall science classes in high school, you learned that the number of digits a person reports should reflect the precision of their estimate. Central bankers often forget that lesson. They sometimes speak as if they are targeting an inflation rate of 2.00 percent. It would be better if Central Bankers admitted how imprecise their ability to control inflation is. They shouldn't be concerned if inflation falls to 1.6. That rounds up to 2. And they should be ready to declare victory in fighting inflation when the inflation rate gets back to 2.5%. As the adage goes, that is good enough for government work".
Mankiw is unequivocal. When inflation is measured at 2.2%, as it is currently in NZ, you've already fully hit your targets. It rounds to 2%. We're already at the Remit's "mid-point". NZ is not "converging" to it, unless you make the mistake, like the RBNZ, of thinking inflation can be accurately measured & controlled to several decimal places, which it can't. The RBNZ thinks we're at 2.2% inflation & it has to get us to 2.0%. That's nonsense. Keeping monetary policy at a "restrictive level", continuing to "engineer a recession", because we're still "converging" to target tells me one thing: the Chairman & Governor of the Bank aren't up with the play and are causing untold harm as we speak. The law instructs the Bank to keep inflation "near" 2% - not at 2.0%. To keep "restrictive monetary policy", financially strangling Kiwis, arguing its necessary because inflation has still not hit the target, breaches the Bank's Remit. My view is that, as such, the RBNZ Board & Governor should be dismissed.