Thursday 27 October 2022

Inflation

Newshub did a roundup on OCR and inflation after the latest Stats release had inflation higher than expectations. 

Robert MacCulloch is disappointed the piece didn't mention monetary policy. 

For what it's worth, here's the full comment I'd sent through to them - they didn't pick up the monetary bit at the start, alas. They'd asked about whether the Bank should be doing stuff beyond OCR, so I spent a bit more time on that. But I opened with monetary because, well, duh.  

“Inflation is the result of too much money chasing after too few goods and services. The global response to the pandemic involved substantial monetary easing, while the pandemic made it more difficult for firms to supply goods and services. Reserve banks internationally failed to update their policies quickly enough. Today’s inflation figures are the result of errors made a year or more ago in inflation forecasting and monetary policy. And the consequences of current tightening will be felt perhaps a year from now. 

In normal times, interest rates are central banks’ main tool for inflation targeting. If the Bank expects that, a year from now, too much money will be chasing after too few goods, raising the interest rate reduces demand across the board. Investment projects, whether in construction or otherwise, that made sense at lower interest rates make less sense at higher interest rates. Increasing interest rates means the Bank does not have to pick and choose where to try to reduce demand, which would be terribly fraught. 

The pandemic involved a few non-traditional monetary responses. The Reserve Bank engaged in substantial quantitative easing, meaning it purchased lots of bonds using new money. It also provided a subsidised loan facility to the banks through the Funding for Lending programme. It makes little sense to be increasing the cost of borrowing through the official cash rate while continuing to facilitate bank borrowing through the Funding for Lending programme. It is scheduled to end in December.

The Reserve Bank is now in a rather difficult spot. It is not crazy to expect global recession in the next year through the combination of global monetary tightening and the effects of the war in Ukraine. Energy prices in Europe all on their own are likely to spark recession there. A central bank expecting global recession would not normally want to be tightening monetary conditions. 

But both inflation and inflation expectations have been becoming unhinged. Earlier this month, the Reserve Bank released the results of a survey undertaken as part of its Remit Review. Less than 5% of respondents said they were “extremely confident” that the Reserve Bank would get inflation back within its target range by 2024. About 20% of respondents were “somewhat confident”. And about sixty to seventy percent of respondents were either “not at all confident” or “a little confident”. 

It means that the Bank not only has to fight inflation but also has to fight to restore confidence in its commitment and ability to achieve its target. A Bank with stronger inflation-fighting credibility could afford a more cautious approach in response to global uncertainty. 

The government could make the Reserve Bank’s difficult job easier by moving more quickly to balanced budgets, and ceasing spending programmes like Enviro-Jobs that had been initiated mainly as make-work in 2020. It is exceptionally unhelpful for the government to fund make-work programmes when private employers are starved for staff. 

The government could also consider signalling, clearly, that the next Governor of the Reserve Bank, to be appointed next year, will be strongly committed to the Bank’s inflation target rather than continuing to divert the Bank into areas far from its core business.”

I'd also suggested a couple times last week, on RNZ's morning report, and in my slot on Nights, that Adrian Orr should not be reappointed and that Minister Robertson should, quickly, very clearly signal that Orr's successor will take a far more traditional view of the role of a Reserve Bank. 

No comments:

Post a Comment