Grimes on the Reserve Bank

Former Reserve Bank Chairman Arthur Grimes is blunt about the Reserve Bank:

But Professor Arthur Grimes, a former Reserve Bank chairman, said there was “not much” Robertson could do as it was the Reserve Bank’s job to control inflation.

“They're completely to blame for allowing this to happen … They’ve been incompetent, they’ve been really incompetent,” he said of the bank.

Grimes, who invented the innovative practice of “inflation targetting” as chief economist at the Reserve Bank in the late ’80s, said there were global factors driving inflation, such as the cost of energy and food. But the problem was now also domestic.

He pointed to the increased inflation of domestic goods and services, which stood at 6.3% for the year to June. This was the highest such rate since it was first recorded in 2000.

“If we’re getting 7% domestic inflation now, and rents going up, and if wages start going up a lot, then it could become quite entrenched above 3%. And that’s when the Reserve Bank really has to cause more pain to bring it down,” Grimes said.

...“This is going to be a real problem. It really is a choice now between wage earners suffering by not getting 7% wage increases, or, if they do get 7% wage increases, it’s just gonna keep on pushing up future inflation. So it's just going to be a mess, whichever way it goes.”

Grimes said with better management, New Zealand could’ve had inflation akin to Switzerland, at 2.9%, or Japan, at 2.1%.

He said the Reserve Bank had “misread the conditions” of the Covid-19 pandemic and in the past three years, it had loosened monetary policy too much, causing a massive increase in asset prices, and cut the official cash rate “more than they should have".

There had been a system in place to control inflation at between 1% and 3%, he said, but the Government “completely mucked that up” by expanding the Reserve Bank’s mandate to not only target inflation, but maximum stable employment, in 2018.

It had seemed obvious, at least by May 2020, that we were dealing with an RBC shock with potential flow-on consequences for demand. That we weren't heading for double-digit inflation was obvious later that year. 

It took a long time for monetary policy to reverse. And now inflation is 7.3% if we ignore the government juking CPI with a petrol excise holiday. It's more like 7.8% if we look through that.