By Alex Tarrant
With incoming Reserve Bank Governor Graeme Wheeler set to sign a new Policy Targets Agreement with Finance Minister Bill English on Thursday, economists are speculating what 'minor changes' might be made from the current agreement.
The Policy Targets Agreement (PTA) is mandated for by the Reserve Bank of New Zealand Act 1989, which legislates the central bank's primary function is to deliver "stability in the general level of prices."
The PTA is effectively a contract between the Governor of the Bank and the Government, setting out the change in the level of prices the Reserve Bank should target over the medium term - which means it only refers to the Bank's price stability goal.
Other roles and powers given to the Reserve Bank, such as foreign exchange intervention, issuance of currency, and financial supervision, are dealt with in the Act itself.
The Reserve Bank Act even allows the government to override the PTA and direct the Bank to use monetary policy for a completely different objective than price stability - for a 12 month period (for which a new PTA outlining the different targets must be signed), and only if the order is made public. Read more on the PTA here. Read the current PTA with Bollard, signed in 2008, here.
What's out, and what's in?
ASB economists said that given Finance Minister Bill English had indicated there would be few changes to the new PTA, the stance of the incoming Governor Wheeler would likely be the more relevant factor in any changes to the RBNZ’s monetary policy outlook resulting from a change in Governor.
Meanwhile, Westpac senior economist Mike Gordon put out a specific note on the possible changes to the PTA. He said its narrow focus meant three factors being talked about in relation to possible changes to monetary policy fell outside its scope.
The first was that the PTA could not remove price stability as the Bank's primary goal, or put other goals such as employment or the exchange rate on an equal footing.
"The Governor can be (and is) directed to consider such aspects, but only as mitigating factors in the pursuit of price stability," Gordon said.
The second was the Governor as sole decision-maker on monetary policy.
"The RBNZ is relatively unusual in this aspect – most central banks decide by vote among a committee or board. It also has a fairly unique enforcement mechanism: the Governor can be removed from office for failing to meet his price stability target," Gordon said.
"The Governor can (and again, does) form an advisory group on monetary policy, but he is not bound by any vote or recommendation, and by the same token can’t pass the buck for failing to meet his target," he said.
These two features were embedded in the Reserve Bank Act, so any change would have to go through Parliament, not just an agreement between the Governor and the Finance Minister.
"That’s not to say that it can’t be done, it’s just that legislative change can be a laborious process – moving to committee decision-making would be particularly complex, as it would require new mechanisms for holding the committee accountable," Gordon said.
"That said, if there were an appetite for change, the way to do it would be to appoint a Governor who was amenable to such changes, and could shepherd them through during the first few years of their term. And appointing an outsider – as Mr Wheeler is – would help to smooth the process," he said.
"The third factor is one of omission. There have long been calls for the RBNZ to develop tools other than interest rates to control inflation, given the collateral damage that can arise, such as an overvalued exchange rate," Gordon said.
"And in fact the RBNZ has spent several years investigating the use of ‘macro-prudential’ tools such as varying bank capital and funding requirements – these are largely aimed at reducing risks to the financial system, but in some circumstances they might bolster monetary policy too. Make no mistake, these new policy tools are coming, and we will have more to say about them in the near future."
"The point here, though, is that the RBNZ doesn’t need to be ‘given’ these tools. In fact, the PTA has never specified the tools that the RBNZ can or should use – its focus is on the ends of monetary policy, not the means," Gordon said.
"The Act is not terribly prescriptive about policy tools either, but it does state that the RBNZ will use its powers for the purpose of "promoting the maintenance of a sound and efficient financial system". An overly intrusive new policytool could face a legal challenge on those grounds," he said.
So what might change in the new PTA from the current one with Bollard?
Westpac gave a number of possibilities, listed from least to most plausible:
Inflation targeting: The PTA defines ‘price stability’ in terms of the rate of increase in the Consumer Price Index. But there have always been alternative definitions, such as targeting a level of prices rather than a rate of change, or targeting nominal GDP (which includes both prices and volumes). We’d put this in the “too radical” basket: there is currently a lively debate around such alternatives, but more as a signalling mechanism for central banks that have already hit the zero lower bound for interest rates. There’s little agreement as to how they would perform under normal conditions.
The target range: As we’ve noted, the RBNZ’s inflation target has been watered down several times over the years. Any further softening can’t be ruled out, though there’s little reason to think that this would bring any long-term benefits. The current range is broadly in line with other central bank’s targets, and past research has concluded that at low rates of average inflation (less than 3%) no one rate is better than another.
That said, raising the target range to 2-3% to align it with Australia would have interesting near-term implications. The RBNZ’s most recent forecasts have inflation averaging just below 2% over the next three years. Faced with an Australian-style target, would Mr Wheeler feel obligated to cut the OCR immediately? In our view, the mere fact that it would put the new Governor in such a position makes it unlikely.
Variations from target: The PTA has always given the RBNZ guidance on how to absorb shocks and one-off factors such as commodity price spikes, tax changes and natural disasters. It’s possible that this list could be extended, but we think the value-added would be fairly low. The current PTA’s focus on inflation over the medium term means that these days the RBNZ is better described as an future inflation forecast targeter; shocks that have already occurred treated as bygones, except to the extent that they could affect the public’s expectations of inflation over longer periods.
Secondary objectives: Aside from looking through one-off shocks, the PTA also instructs the RBNZ to avoid “unnecessary instability” in cyclical factors, namely output, interest rates and the exchange rate. Again, it’s possible to add to this list. The obvious candidates would be asset prices and/or credit growth, given the experience of last decade – around the world, asset prices soared and financial imbalances piled up, while only mild goods and services inflation meant that central banks had little mandate to respond.
We think that some acknowledgement of the role of asset prices is possible in the new PTA. However, including it under the ‘avoiding instability’ clause would be unhelpfully vague, and would vastly underplay the amount of work that the RBNZ has put into developing macro-prudential tools. It would be better to give asset prices their own separate consideration – for example, noting that the formation and bursting of ‘bubbles’ can hinder price stability over the longer term, even if it doesn’t affect CPI inflation over the medium-term forecast horizon.
20 Comments
So there's reasonable hope we will not quite get business as usual for the next five years. I understand why National doesn't want to admit it has sat on its hands while our manufacturing and export industries have trod water or gone backwards for the last four years; but nor you would think would it want to go into the next election with those industries still despairing over a very uncompetitive exchange rate, and with a current account deficit of over 5%, as otherwise looks likely. Having to sell more assets to pay for it all won't play well in 2014 either.
So just maybe they will in fact allow, encourage even, the new governor to follow more competitive policies. I live in hope.
He got the overpaid job because he will do what he is told by the govt which is instructed by the bank bosses that he used to work directly for.
Debasement of the Kiwi will continue at 30% plus per decade..enough to allow the indebted to escape market justice.
The banks will keep the opportunity to feast on the floating and predictable Kiwi$ yo yo play.
No attempt will be made to throttle any property market bubble, especially not when it is all about Auckland and farmland values....too many pollies have too much at stake in these markets.
Expect lip service statements aimed at easing peasant concerns over the real path of the economy...ie 'Jaw bone activity'
On no account is Wheeler to embark on any policy moves without the express approval of the Beehive (read--- approval of the big bank bosses)
We will not see maximum LVR fluff but we will hear the occasional blurt and blah
The Basel 3 deadlines will be fudged and lost in the fluff...banks are here to reap fat returns, not to foster a stronger less indebted nation.
Expect the $5 note to be removed and replaced with a plastic coin...as it is of almost no value now. A new $250 note featuring the usual on one side and a tourism shot on the other, will be all the news ( Fiddle riding a bike down the side of mount Cook). These great events will be Wheeler's chance to avoid any sharp questions from the media.
Wolly,
I think you are making some of your arguments up. I agree with the sentiment that the pollies and Bollard seemed in thrall to the bankers; and also to your highlighted line:
banks are here to reap fat returns, not to foster a stronger less indebted nation.
On the debasement of the currency though the facts tell an opposite story, and its my contention that has been a result of the RB's biggest failure; ignoring the carry trade in chasing investment returns, which was a prime cause of the property bubbles; and of our overinflated exchange rate. You talk of continued debasement of the currency at 30% per decade.
In the last decade, since September 2002, the NZD has in fact appreciated from USD 0.47 to $0.81, a massive 72% appreciation. We have similarly risen by 67% against the pound; from 30.8p to 51.6p now. Against the Euro we have gone up 33%; only against the Aussie have we declined, by 11%.
That any manufacturers or exporters at all have survived with that kind of appreciation is heroic on their part.
That is why we are borrowing or selling assets by $10 to 15 billion per annum; or $200 million to $300 million per week. In the 20 minutes I've taken to write this, we've lost $1 million.
So your depreciation is indeed coming, whether forced on us, or whether we actively do something about it, as I suggest we should, for reasons that will be clearer when I try and debunk a couple of your arguments below.
Mist, Wouldn't surprise me at all. It is a matter of perspective. Some argue that the famous "Japanese housewives" have saved us. I would argue they are very much part of the cause of the problem; the other cause being our own demand for the debt to spend on a short term better lifestyle.
And here is what you can expect in the near future...
"There is a "decent chance" that the Bank will cut interest rates in November, according to a leading economics consultancy. Such a move would be a further blow for savers, who have been grappling with rates at a historic low of 0.5pc for three years and have recently seen several best buy savings accounts withdrawn from the market"
Yes it's the UK sickness...coming to NZ soon because Wheeler will be told to slash the ocr lower...in a repeat of Bollard's error...aimed at boosting borrowing to build some fake growth numbers...but resulting in considerable pain to those who thought saving for retirement or for a new house etc was the way to go.
Don't save...borrow...join the circus...push that property bubble along...remember the pollies have gambled too....and the banks deserve to feed off your future ...and borrowing is good...greater debt means greater growth...just ask any Greek peasant.
Right.... Mr Wheeler?
My third salvo is by way of a lesson from Pommyland...with hope that Wheeler might learn from it...might!
"In the first warning of its kind from a major British company, chief executive Philip Bowman said the £375bn bond-buying scheme was keeping gilt yields artificially low and partly explained a jump in the company’s pension deficit to £620m in the last financial year from £199m a year earlier.
Smiths, which makes airport scanners, medical devices and seals for oil and gas pumps, has injected £378m into its pension scheme over the past five years to service the mounting deficit, and £122m in the past year alone. "
You see Mr Wheeler, when a reserve bank manipulates rates lower in an effort to prop up bank profits on the back of a borrowing binge and bail out fools who borrowed too much in the first place...there are nasty consequences for some!
If You Want to Help the Poor and the Middle Class, Encourage Deflation
http://www.oftwominds.com/blogsept12/deflation-is-good9-12.html
Andrew,
Am not sure if your tabling this reference is tongue in cheek, or whether you really believe it. The paper conveniently forgets most of the side effects common with deflation. I don't believe the deflation of the 1930s helped the poor and the middle class at all. Inevitably it comes with lower wages and/or higher unemployment, as by definition it is an indicator of less demand for goods and services.
The paper acknowledges that property foreclosures certainly increase when there is deflation. Even under US law, I don't expect foreclosures are fun for those foreclosed, even though the borrowers can walk away from the debt by handing the keys back to the bank. Here our law is such that you owe the money to the bank, even if the sale of the house does not meet the full loan. The bank can bankrupt you; again, not a fun experience I expect.
yes, if I read it right it seems wrong, badly wrong.
For instance it says $1000 earned but when it compares deflation it assumes wages dont drop in line or faster than deflation...but remain constant. Its written as if you have capital (cash) in your hand then you are better off, "cash is king" but we are talking workers...In fact if you have debt the debt becomes a bigger, crushing burden...
Then there is rising un-employment (a bigger % cant buy anything at all), then there is ppls fear of that so they save so spending drops so more un-employment etc etc...Then there is teh impact on tax, less employed, higher tax take needed, more un-employed higher tax take needed.
While some states have jingle mail, not all do....and yes NZ doesnt....if they bankrupt you...I think its meant to be clear in 7 years paid in full or not? what happens with say even 10% of ppl going bankrupt? even if they pay it all back and thats not likely that means banks risk having to be bailed out, see "higher tax take needed.
One huge nasty spiral, so I find this piece grossly stupid......
regards
Steven - this is an interesting read.
https://www.credit-suisse.com/investment_banking/doc/cs_global_investme…
When inflation is within a market wages are slow to follow in the upward trend.
Wages don't drop in line or as fast when there is deflation.
yes wages are "sticky" when you see an average drop that tends to mean that ppl who have lost jobs take on new at far less salary. Same with inflation....
http://www.energybulletin.net/stories/2012-09-19/close-tie-between-ener…
Thanks that looks "neutral", could be a good read.....
regards
A good read....interesting the comments on why say the "old world" has under-performed....is it that developing countires are more vibrant? (I dont think so) or that [lack of] cheap and local resources (including labour) make the difference (I think so). If so of course that suggests equities all over will be poor performers (at best)....
regards
Andrewj - interesting article. A few months back ago I made up a spread sheet using the average price of a house in NZ for my examples. I then worked some figures around so I could gain a better understanding of what would happen if we did have deflation. I deflated the house value to 50% of the original average price. I placed a goal of not defaulting on the debt in my models which for my models I used a 100%. I then applied various years in which I would make full payment. The total amount of money I needed to employ to pay the house off in my deflation model was significantly less than what I needed to use in my other inflationary model.
I also worked some figures around on years to pay and different interest rates that could affect my models.
We can make money when the sharemarket goes down and housing is actually no different.
That deleveraging hurts savers is almost always true; the best answer is not to let debts get so out of hand in the first place. We are though where we are.
British unemployment is at 8.1% from 7.9% in June 2009; Spanish unemployment is at 25.1% from 18% in June 2009; and Greek unemployment is at 24% from 9.3% in June 2009. Remember that being stuck in the Euro, the Greeks and Spaniards cannot enact the policies that the BOE can. I would contend that the unemployment rate is as good a proxy for a misery index as you can get. The fact the Brits find it a bit harder to get to the Maldives for a holiday doesn't really compare as a misery indicator.
Our unemployment rate has gone from 6% to 6.8% in the same time; far from disastrous by comparison, but helped by 50,000 a year leaving; and funded by borrowing or asset sales worth 5% of GDP every year. The UK's current account deficit is 2% of GDP; not too bad given their main trading partner is Europe; and their premium industry, finance; both of which have been sick the last 4 years.
The article you have linked to does show a particular problem with defined benefit pensions invested in savings accounts or gilts. Any pension funds invested in shares or property would be far more grateful for the QE, as without both theirs and the US QE, world sharemarkets would almost certainly have tanked massively.
We are going to have to wean ourselves off this addiction to not paying for what we spend at some stage. I suggest we do it sooner rather than later; and manage it, rather than have it forced on us. The BOE, in the last 3-4 years has actually done a pretty good job, having dropped the asset bubble earlier, as everyone did.
but were that 50,000 employed or not? If un-employed then yes that is clearly less tax burden. If and I suspect its the case most of these were employed ppl then there is some loss of tax income and profit, assuming the some of the vacancies are un-filled.....and/or the replacements are less skilled...
Pension funds, yes, this is a dead cat bounce...coyotee moment anyone?
regards
Stephen L - If Govts had left the markets to their own devices and created a platform of fairness across the board for everyone the markets would have addressed the problems that presented. Savers have simply been hurt by policies applied and most of the policies applied in most countries were what the IMF suggested.
Unemployment figures could look a lot worse if all this printed debt is inflated away. Take hyperinflation for example great way to make debts look significantly smaller in a relative short time frame. How many people would become destitute and unemployed in the process? NZ is a very small player in a very large market and so we bare the brunt of what happens in overseas markets regardless of how well it is managed here.
I don't think GDP is a very useful or honest measure as it really only measures economic activity and not the fundamentally more important issue of profit generated from such activities. I also have problems with inflation indexes used as things are omitted at will which distorts what is really happening.
In response to world sharemarkets - many assume that because a share price drops a loss has been made and this is simply not true. The person on the other side of the trade has simply picked up the money and/or the shares at a lower price. Shorting the markets is common practice and big business so this money is not lost. The investor who owned the shares without protection lost their money and the person who shorted the market gained. It's a simple wealth transfer that occurs.The owner of the original shares could have bought some put protection as an insurance and didn't. This is like owing a house without insurance. The people on the winning side of a trade are the people who stabilise the market by providing a baseline of value on a particular share. This is the market self-correcting when things get over-valued.
In regard to QE - did this money go into the sharemarket? Most of what I have read suggests it hasn't and that this QE money has ended up in Govt bonds.
This article alludes to QE1 & 2 going into the sharemarket. Not sure if #3 has done the same - maybe too early to tell.
http://www.zerohedge.com/news/guest-post-trouble-printing-money
Does it really matter whether it's gone into bonds or stocks? Either way it's still only extend and pretend, kick the can a little further.
meh,
Thanks, interesting. notaneconomist, this paper does show that the QE by the US and elsewhere has lifted the sharemarket (whether sustainably is perhaps moot); and my previous post was really about a specific issue with low interest rates and pension funds. They suffer from low interest rates, but assuming they have a diverse portfolio, benefit from the sharemarket rising.
The paper otherwise is clearly no fan of money printing. It does though have the opinion that if the US and Europe print, then "Japan has to print, given its economy is based on exports". No coincidence that Japan has just announced such printing; my own view is that we also need to be an exporting nation somewhat more then we are, given our current account position. Why do we therefore not need to print, when Japan must?
In another observation, the paper effectively says look out when China realises the trillions it has loaned to the US have lost their value, implying that China will do something drastic in retaliation. I don't think they are going to head down the military route, so what else will they likely do, that would not massively shoot themselves in the foot? The same can be said of all surplus/creditor nations, who have been loaning countries money to buy stuff from them. What actually do they do when those loans are devalued? Which the logic of their current account deficits says they must eventually do.
What should NZ's position be re printing; and getting a competitive exchange rate, along with buying back some of our own debt- the best use of any printing?
For all the sterling thought posted above...Wheeler will give us more " wait n see" under a new Banner to be known as "Pause and reflect". He will suddenly be spured to action as ,and when, the RBA initiates a possible Houdini from the corner it has painted itself into.
All said n done , it's the lying that hurts.
I must find him a pet name...hmmm ? in a while, it'll come.
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