By Alex Tarrant
Inflation is no longer the bugbear it once was, meaning monetary policy is not a big focus for the government, which will turn its attentions to issues outside the Reserve Bank's realm, such as productivity, trade, and building confidence in the economy, Finance Minister Bill English says.
Those calling for changes to New Zealand's monetary policy regime, by seeking more of a focus from the Bank on employment and growth, better not hold their breath. The Reserve Bank had done its job controlling inflation, meaning the onus was now on other players in government and the economy to do their job.
Reserve Bank Governor Alan Bollard's decision to step down in September this year has sparked discussion of whether the transition period to a new governor should also see changes to the Reserve Bank's current single focus on inflation and inflation expectations. The current Policy Targets Agreement the RBNZ has with the government, the Reserve Bank is tasked with keeping medium-term CPI inflation within a 1-3% target band.
It would be naive to think that altering the Bank's Policy Targets Agreement with the government to try and force it to also focus on employment or economic growth would make a difference, English told media in Wellington today. The Opposition Labour and Green parties contested the 2011 general election with a policy to broaden the Reserve Bank's objectives.
"There seems to be some debate about it [the Reserve Bank's role] as if we’ve got a big inflation problem. In fact we don’t have an inflation problem - inflation’s dropping away. We need to get on with more growth,” English said.
“I think they’re fighting the last battle. That was a big issue three or four years ago, the issue now isn’t monetary policy, it’s been quite accommodating. The issue is building confidence and building investment," he said.
“The world’s changed, inflation is not the big bugbear. What we need now is more investment, more savings. Monetary policy’s not a big focus.”
Change the RBNZ's focus?
“It’s naive to think that if you put the word ‘employment’ or something else into the policy targets agreement [that it is] going to change the economy. It’s not," English said.
“The Governor has basically said interest rates are going to be flat for quite a while, who knows how long that’ll go for," he said.
“There are a whole lot of other issues that are much more important around productivity, around getting our resources into the tradable sector, around building investment, getting Christchurch rebuilt, that are much more important than what’s a fairly esoteric debate that’s been had many times in the last 10 years with no change.”
Monetary Policy Committee?
Meanwhile the government had not seen any reason to change the way the Official Cash Rate was set - currently solely by the governor of the bank - to being set by a monetary policy committee.
"If only because we don’t have a whole lot of monetary policy experts around the country," English said.
That had been looked at before as one of the peripheral arguments over monetary policy over the last 10 years, he said.
No more room on inflation front
English's comments come after Prime Minister John Key yesterday also said he was comfortable with New Zealand's current monetary policy framework.
Key was against the Reserve Bank being given more room at the top of its inflation target band, saying inflation ate away at the wealth of those on fixed-incomes.
(Updates with video)
35 Comments
I received in the post this morning a letter from Telecom apologising for the late notice (technically it wasn't late - as the increase applied from Feb 1st - it was 'backdated')... annoucing an increase of 24.6% on wiring mainteance. WOW. I am sure glad inflation is beaten! Imagine the increase if it wasn't! thats over 13 times the official inflation rate as it is... and its not like I'm getting any extra service for that - so its just a pure price rise...
CAN SOMEONE PLEASE EXPLAIN TO ME WHAT THINGS ARE GOING DOWN IN PRICE SO I CAN GO BUY THOSE THINGS INSTEAD AND FEEL RICHER?
The "Kiss of Death". The subtext of English's statement is "Inflation is dead" the RBNZ is no longer necessary, or its role could be expanded to other things, such as, takeover responsibility for WINZ
Alex, could you put that in the "predictions" table to look back at in two years time and laugh.
If this is the case, why not now use the lull to adopt an approach that better targets the inflation that is the root cause, and with appropriate tools:
"A better strategy for the Reserve Bank would be to:
• Target non-tradeable inflation;
• Use Loan to Value Ratios to control credit volumes; and
• Specify the amount of savings (deposits) banks are required to raise in New Zealand to limit offshore exposure.
“Had this been done 10 years ago debt levels and servicing costs would have been lower even if average interest rates had been higher. Overall the New Zealand economy would now be better balanced with higher wages, more jobs, more savings and better housing affordability,”
http://www.realeconomy.co.nz/244-cpi_down_ocr_cut_makes_sense.aspx
This is how Texas do their LVR regime:
http://www.statutes.legis.state.tx.us/Docs/CN/htm/CN.16.htm#16.50 "(B) THE PRINCIPAL LOAN AMOUNT AT THE TIME THE LOAN IS MADE MUST NOT EXCEED AN AMOUNT THAT, WHEN ADDED TO THE PRINCIPAL BALANCES OF ALL OTHER LIENS AGAINST YOUR HOME, IS MORE THAN 80 PERCENT OF THE FAIR MARKET VALUE OF YOUR HOME;...." Why can't we have similar? Wolly, over to you. Cheers, Les. www.nzmea.org.nzNo wonder Alan Bollard has decided he is not staying....imagine having to put up with English every day....
Here....focus on this English....
I have a question, Wolly, anyone - when suggesting an LVR regime as a supplement to the OCR, people often object not with arguements against effectiveness of the concept, but usually by citing the disintermediation and circumvention of credit controls back in Muldoon's day. Do you Wolly, anyone, know how the regulation, legislation, back in Muldoon's day, was constructed, monitored and offending behaviour penalised?
Cheers, Les.
Have been pondering just this issue for some weeks. cant give you an exact answer, but back then (from memory) the banks weren't in the mortgage business. If you wanted a (table) mortgage to buy a house you went to your insurance company or joined a building society and got a 25 year mortgage. Funds available for lending were limited to inflows or deposits and these institutions were conservative. They didnt source funds from overseas. LVRs were max 70%. It was an industry standard. Dont think it was a government decree.
Hi Les, you are not going to get LVR controls worth a dam because the banks own the govt. The system is one stinking big game of credit creation wrapped in media stupidity with political support...the day the cost of overseas credit explodes higher is the day the country dies.
I Liked this bit best:
The Reserve Bank had done its job controlling inflation,
Not sure who actually thinks that this is even remotely true. The RB deliberately ignored asset price inflation and the mountains of cash that were created to fuel this inflation as if it would never matter.
The RB has sat back and watch the value of every single dollar we have go down in flames
Do people really not get this this?
Iain - further to that, when you have every major central bank in the world now printing literay trillions of dollar/euros/pounds/yen/Reminbi, inflation wont be dead for long - as a Central banker/finance minister, you talk like its wiped, play with the stats to make it looked wiped, and then when you have inflation back up to where you want it (higher for debt reducing reasons), and 80% of the public is on the floating rate, you screw them with higher rates to bring inflation back when the job is deemed done - the spike in fixed rates at that time will be enormous.
I'm not suggesting its the NZ approach, but its becoming very clear its the major global CBs approach, and something that will equally and eventually bite us in the bum with imported inflation
Just dont ask me to put a timing on it.
Inflation happens when you have more NET money in circulation....this isnt the case today.....
Also read up on liquidity traps....
and The govn's printing isnt offseting the money not being spent elsewhere...
Consider that for the last three years we have had a lot of printing and the core inflation rate is 2% STILL and the trend is probably down or at best flat...after three years we should be seeing signs of inflation at least in a consistant upward trend.....there is little to suggest this is the case.
"when" indeed that is the answer.....6 odd years out I think...and before that huge deflation will have occured. So setting yourself up for inflation today is plain silly IMHO.....but as a grownup, make your own decision.
regards
Hold up steven..if the morons in Iran trigger a war in the Gulf the price of oil will blow out and since we import almost all that we use...you will get inflation. If Bernanke presses the keys and prints again as he probably will...commodities will leap in price and that means higher prices and that is inflation....The NZ govt is set to allow power generators to hike power costs by at least 1% above the 'inflation rate' then prices will rise and that's inflation....if and when the EU piigs debt banking govt farce blows up and the cost of credit rises steeply..prices for credit in nz will rise and that's inflationary...All of the above will mean councils will demand higher rates above the reported inflation rate...and that's inflation...
Inflation is not tied to the quantity of money and credit in circ...
Sorry, which countries morons?
If you were a small country that watched the most powerful collection of bitches beat the crap out of your neighbour on trumped up charges, wouldnt you want something to wack them back with if the bullies comes a callin' ?
I know I would if I could.
No, no inflation, not for long.....inflation happens on a minor/moderate event....this would be severe....
There was a wargame scenario played out some years back.....I think the conclusion was take 4% of oil off the market and the price of oil quadrupals......take oil to $160+ and we will trigger a mega depression.....oil and hence petrol will be scarce and rationed.....economies will grind to a halt....
http://www.youtube.com/watch?v=IWGsnW_NnxE
Power and inflation.....if and this is the case that ppl have no more money to spend then if they have to pay more for power they have to pay less for something else...the NET is at best zero....but is WORSE....
Now if in the less market say you have less DIY, less TVs etc then Placemakers lets go staff, DSE goes out of business...lets go staff....these ppl now have no spending power, they take on no credit, even default...thats deflationary.......your economy shrinks.....thats a recession/depression.....
So when the Govn says its letting the SOE's rise at 3% (2% core inflation+ 1%)....its realling saying lets shaft someone else, in this case probably the trading sector ie businesses by 1%+
If the cost of credit rises even a small amount let alone steeply ppl will use it less, so they buy less, that hits retail even harder still....
This has been happening for the last 3 years.....this is why we have not had 6% growth even though JK etc expected it (and didnt understand why not).....he and many others follow a faulty economics model....it cant handle whats happeneing and their ideaology cant either....
regards
I think as someone else has commented here, he probably means experts well versed in the Neoclassical approach and who will doff their caps to the status quo'ists without question.
It'd be much better to have a committee and include in that committee, non-experts in monetary policy, but people who are operators in the wider real economy, ie. not just ag.
Oink, oink, flutter, flutter.
but if the neo-classical's outnumber the not.......the voting will still go neo-classical.....
Monetary policy is finshed anyway....peak Oil made it obsolete....
I'd give the job to Steve Keen....No one else comes close...have to hope that Dr Bollard's replacement is as good a fire fighter....and pragmatic....
regards
Maybe I don't understand but why do we need an expert so set the OCR? For all the accusations of political interference, experimental monetary policy, bad forecasting and construction of a housing market bubble it would appear the reserve bank and governor is responsible for none of this.
It would appear that the RBNZ policy is simply to closely follow the 90-day bills rate, a policy followed by virtually every reserve bank in the world as far as can be observed. They are even published on the same page.
http://www.rbnz.govt.nz/keygraphs/Fig7.html
Maybe somebody can understand why this correlation holds, or why the reserve bank would choose to follow the market?
"it would appear the reserve bank and governor is responsible for none of this"
Correct.........
Lay it on the Pollies, they deserver every single slap........the best the RB Gov can do is mitigate the Pollies cockups, do wrongs or do nothings......
BE is in the hot seat pure and simple.....
regards
Actually scapegoating the politicians doesn't do anybody any good. NZ as a democratic whole should develop policies which do solve these problems, and then select leaders who are going to implement them. Scapegoating even the current government just because they don't help will probably end us further in the hands of extremeist undemocratic leaders.
It would also help to understand why the RBNZs policy of simply following the 90-day bill rate appears to have smoothed out inflation. Is this just a myth? Is it a co-incidence that we have not had another major cycle? This would probably indicate something about the true nature of inflation and the business cycles.
If this is the RBNZ policy then obviously blaming Bollard for a housing bubble is complete fiction. But one should ask the question, should the reserve bank governor be given policy tools which actually control housing inflation?
The RBNZ,Treasurey and English are deluding themselves and NZ thinking that growth and good news is round the cornor. It might feel like and look like it if you ignore the snowballing debt thats building in the background. Inflation may seem like its beaten for now but borrowing and printing money have papered over the cracks of structual problems in the economies of most the the western world.
The price for not learning the lessons of histroy has yet to be paid, but paid it will be. NZ will not be imune and the current borrowing will make sure that things will be worse than they would have. What is happening in Greece could easily happen in NZ. Read this:
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