By Bernard Hickey
Labour Finance Spokesman Grant Robertson has launched an aggressive new attack on the monetary policy framework used by the Government and the Reserve Bank, saying it is time for a major rethink after CPI data published yesterday exposed its shortcomings.
Robertson called again for the Reserve Bank to target job creation as well as inflation, pointing to the dual inflation and employment mandates used by the Reserve Bank of Australia and the US Federal Reserve.
His comments came after figures yesterday showed deflation of 0.5% in the December quarter and annual inflation of just 0.1% -- the lowest since 1999. The December quarter CPI result was the fifth consecutive quarter where annual inflation has been below the bottom end of the Reserve Bank's 1-3% target range and inflation has been below the 2% midpoint specified in the current Policy Targets Agreement for more than four years.
"The lowest inflation since last century combined with rising unemployment and turbulent global markets is making a farce of monetary policy," Robertson said.
New Zealand’s monetary policy framework, whereby an independent central bank targets inflation using the Official Cash Rate, "is outdated and not fit to handle significant changes in the economy," he said, adding the Reserve Bank was now between a rock and a hard place with historically low inflation but with an "out of control" housing market in Auckland.
“It’s time for the Government to not only make a bigger contribution to tackling the housing market. They need to rethink monetary policy," he said.
“The Reserve Bank hasn’t hit the 2 per cent midpoint of its inflation target since the current Policy Targets Agreement was signed in 2012 while unemployment has remained stubbornly high."
Robertson said the singular focus on inflation was hurting exporters and preventing businesses from investing in new jobs, particularly when compared with other countries with much lower interest rates.
“It’s time to broaden the objectives of the Reserve Bank to make job creation a critical part of its mandate to help deliver economic growth. This isn’t revolutionary – it’s similar to many reserve banks across the world," he said.
"When you reach 15 quarters outside of the mid-point we do have to ask ourselves what we're doing with monetary policy," Robertson said later in an interview.
"It's a reminder that if we want to re-balance the economy and get a greater focus on reducing unemployment the Reserve Bank has a role to play in that, and it needs a different mandate to do that," he said.
'Change the objectives, and then the PTA'
Labour wanted to change the objectives of the Reserve Bank Act to include a mandate for employment, which would flow through to a different PTA, he said, pointing to the way the Reserve Bank of Australia (RBA) and US Federal Reserve operate monetary policy. This is not a new Labour policy, but the repeated undershoot of inflation has lifted the volume of the debate in recent weeks, with NZIER, BNZ and HSBC also questioning the Reserve Bank's framework in recent weeks.
"The RBA has objectives that talk about employment and the overall health of the economy. It would have to be expressed through the legislation, and then through the specific objectives and the PTA would be negotiated off the back of that," Robertson said.
Questions about which of the inflation and employment targets to prioritise in different situations would have to be worked out in the PTA, he said.
Robertson said the Reserve Bank also needed to meet its existing targets, but there should also be a wider debate about a different monetary policy framework.
"I don't see those two things being mutually exclusive. Yes they should be doing the job they're currently given, but we can certainly have a debate about whether there's a different way of expressing that job," he said.
"Clearly they're not meeting the targets that have been set for them, and that's why we need to have the discussion."
Some have argued that a small amount of deflation or very low inflation is not damaging, if it is driven by supply shocks and is not a demand-driven problem that triggers a deflationary spiral.
"Graeme's argument is that we're entering new territory on this. If that's the case, we need to take another look at the agreement, but for now, clearly they're not meeting the targets that have been set for them," Robertson said.
Robertson pointed to an unemployment rate that was stubbornly high at 6.0% and rising, while deflation would discourage businesses from investing.
"While you could possibly run a small period of time where moderate deflation will be OK, I still don't think over a long period that would be good for the economy and we've got to be doing more to address a stubbornly high unemployment rate," he said.
Should Graeme Wheeler be reappointed?
Asked if Bill English should reappoint Graeme Wheeler for a second five year term as Reserve Bank Governor from 20I7, Robertson said: "I've got a lot of respect for Graeme. His analysis of the economy has been pretty good. There was criticism of increasing the rates in 2014 and I was one of them who questioned that. He's a person with enormous integrity and a very, very solid background in this area. The targets agreement has not been met, but I wouldn't want to bring that down to him personally at this time."
"I'm not close enough to all of the discussions about whether he should or shouldn't reappoint him and ultimately it won't be a decision I'll be involved in, but I've got a lot of respect for Graeme," he added.
Robertson did not mention Labour's Variable Savings Rate policy from the 2014 election in his statement, but repeated previous comments that it was under review.
"That wasn't mentioned today and won't be in the foreseeable future," he said, adding Labour preferred to have a simple policy that gave voters certainty.
'Modulate the flow of migration'
Robertson also pointed to the pressures on unemployment from the recent record high migration, particularly of lower skilled students and those on temporary work visas.
"We think there is scope for modulating the flow of migration coming into the country," he said, noting however that some migration could not be restricted, particularly of New Zealanders returning home, various Pacific Island migration agreements and family reunification.
"Overall migration into New Zealand should be a good thing for the both economy and the diversity of our society. We've just got to make sure we can moderate it at times where it's putting pressure on the economy," he said.
Labour was sceptical about the Government's October 2013 change to allow foreign students to work during term time, which drove a significant part of the migration surge.
"We need to prioritise quality. I'm concerned that people will be coming here to work, rather than to study. We're quite sceptical of that policy and we're looking quite closely at whether that works," Robertson said.
"Is it potentially displacing New Zealand students from work? We don't have any evidence on that. The big increase in the numbers of those students deserves a lot deeper investigation into exactly what courses are they doing."
Labour preferred the Government focused more on encouraging post-graduate students at universities.
"Where people are attracted here because they can work additional hours, that doesn't feel to me the best basis for international education," he said.
HSBC also questions inflation targeting regime
Elsewhere, HSBC Australia and New Zealand Chief Economist Paul Bloxham, who popularised the 'rock star economy' tag for New Zealand in January 2014, cut his forecast for the Official Cash Rate in 2016 to 2.0% from 2.25%, saying further rate cuts were needed to achieve the bank's inflation target, despite financial stability concerns.
Bloxham said New Zealand's inflation targeting regime, which was a world pioneer when introduced in 1990, now faced a critical test with inflation in calendar 2016 set to rise to no more than 0.7%. HSBC had cut its 2016 inflation forecast in half, he said.
"The longer inflation remains below target, the greater the risk that ‘inflation expectations’ fall, embedding the problem," Bloxham said.
"Constantly missing the inflation target may be a challenge to the RBNZ's credibility over the medium term."
Bloxham said the Reserve Bank's policy targets agreement gave it the scope to look through short term deviations and a short period of disinflation may be a good thing, if it was related to an increase in supply potential rather than a lack of demand.
"However, a prolonged period of low inflation increases the risk that inflation expectations become unanchored and low inflation becomes embedded," he said.
"This could mean persistently lower wages growth, lower neutral interest rates, less ability for the central bank to stimulate the economy, and a greater chance of damaging episodes of outright deflation."
(Updated with comments from interview with Robertson)
31 Comments
Robertson said the singular focus on inflation was hurting exporters and preventing businesses from investing in new jobs, particularly when compared with other countries with much lower interest rates.
“It’s time to broaden the objectives of the Reserve Bank to make job creation a critical part of its mandate to help deliver economic growth. This isn’t revolutionary – it’s similar to many reserve banks across the world," he said.
Hmmmmm.
The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act. Read more
And yet US citizens end up with monetary policy outcomes better suited if they were all Kings, when in fact they are targeted taxpayers scratching around trying to make a living serving their industrial scale employers, for minimal return.
...Hmmm Are you talking about the US or NZ. Quoting Policy from the US Fed and mixed metaphors & diatribe kinda loses me. Try again and use good ole kiwi colloquialisms.
However, we might agree that the Currency War thats been played out for the last 5 years is about to hit a speed bump. A bloody big one....maybe thats why we have TPPA, TTiP(EU), NAFTA, CAFTA, BRIC 90% of world trade tied up in Allied allegiances. The last time something of this nature on this scale happened was WWI....the Aristocrats getting shitty with one another.
Ahh, the advice of that great monetarist Grant Robinson.
New Zealand's MP framework "is outdated and not fit to handle significant changes in the economy". What is he basing this statement on? Anecdotal evidence for the performance over the past 18 months? Not quite enough to substantiate such a claim, I don't think...
Does he have any tools in mind for this job creation responsibility, or is it just a trendy blanket statement these days?
Perhaps he could first get the financial state of the Labour Party itself sorted before criticising the role and performance of possibly the best run monetary system in the developed world.
If job creation was a target of the RBNZ they would probably drop rates to stimulate the economy and risk the possibility of a little bit of inflation. Without that target they are basically running the economy slower than they need to just in case there is some inflation around the corner.
Well yes, naturally, the unemployment rate is already controlled by the OCR through a Phillips curve-esque relationship so we do consider that interest rate changes indirectly affect employment through investment. However to make it a primary target as well as price stability the RBNZ would require an additional specific tool to manage it.
The governments hands off policy handed control of the economy to the RBNZ and set an inflation target of 1-2%.
They could not achieve 2% so the uped it tp 3%
Now they cant make 1%
I thought the RBNZ HAD to keep inflation between 1% and 3% but it seems they don't have to. They can do as they like.
Back then we were told that people have to learn to get used to low inflation.
Now we have to learn to get back to high inflation.
Drunks in charge of the brewery if you ask me
Every thing was on the premise the inflation was here to stay, to inflate the debt away.
Now with no inflation the rules have changed, now we get to experience the real cost of debt.
Which means soon the government will be forced to cut costs.
The dairy farmer experiencing %7 capital gain doubling the value of his asset every 10 years while ignoring the inflation of his costs at %8 compounding, suddenly finds the game has changed, falling land values but the costs are stuck solid.
AJ, I'm interested in why you think the Government will cut costs?
As household/private debt reaches a saturation point (perhaps with a bit further to run with lower interest rates) I would think the Government may need to take up the slack to avoid recession? The first hint being Bill English abandoning the surplus target.
Export receipts will be down, dairy worse than first thought for longer, beef back $500 a head from last year Lamb back, small store lambs made as low as $30 before Christmas. Commodity slump will dampen consumption especially in China.
The governments falling revenue will make borrowing hard. Add the government debt to this figure, and tell me how much more the ship can take?
How about this admission, to add to your list.
The Government has announced an aspirational target to reduce the total number of people receiving main benefits by -25% from 295,000 people in June 2014 to 220,000 in June 2018, which will reduce the long-term cost of benefit dependence by $13 bln. Read more
I guess there will be more beggars on the streets.
Who knew it would turn out to be poets day today...
On the Swag
His body doubled
under the pack
that sprawls untidily
on his old back
the cold wet dead-beat
plods up the track.
The cook peers out
‘oh curse that old lag –
here again
with his clumsy swag
made of a dirty old
turnip bag’
‘Bring him in cook
from the grey level sleet
put silk on his body
slippers on his feet,
give him fire
and bread and meat.
‘Let the fruit be plucked
and the cake be iced,
the bed be snug
and the wine be spiced
in the old cove’s night-cap:
for this is Christ.’
– R.A.K. Mason –
Back in the 1970s UK labour tried to reduce un-employment by spending stoking inflation but after working for a while they found that both inflation and un-employment went up.
"“I tell you, in all candour,” he went on, “that that option no longer exists. And in so far as it ever did exist, it only worked on each occasion… by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step"
Now today we can say its highly likely that we can reduce the OCR and maybe get less un-employment, but as above the points out second string was Govn spending and its dangerous when mis-used. What worries me is I see no such qualification from GR that he realises this.
On top of that I would argue that if the RB was attempting to get the OCR back to 2% then that would have an effect on un-employment. So in the first instance the RB should be doing its job but doesnt seem to be.
"Constantly missing the inflation target may be a challenge to the RBNZ's credibility over the medium term."
Bank of Japan is facing such criticism today.
The central bank bought corporate bonds in market operations at minus 0.03 percent on Wednesday, according to data from the central bank. While the BOJ has purchased company notes at zero interest in the past, it’s the first time for it to buy the debt at negative levels, according to data compiled by Bloomberg.
“The BOJ could end up becoming the final arbiter of everyone’s creditworthiness by deciding whether or not to buy a bond,” said Nakazora, ranked Japan’s No. 1 credit analyst in an Nikkei Veritas investor poll in 2015. “Investors will be saddled with risks if credit spreads aren’t reflective of a company’s creditworthiness.” Read more
Is this the end of money as we know it?
What planet are we living on? It is, at least, truly the death of money both as an economic tool and even the living, historical concept. Again, if we think that only something for or from Japan, ask yourself what a Yellen might do if 2016 turns out the way it is shaping up. Our future is continuously bleak as central bankers cling with religious devotion to increasingly absurd redistribution schemes, or to fix the error – them. Read more and more
Just how does he expect the RB to achieve this? Tinkering with monetary policy won't do it. Job creation is achieved through regulation, having things like tariffs to prevent cheap exports undermining local manufacturing, creating an environment where manufacturing and export businesses can thrive. Most of this was killed off when globalisation meant that many manufacturers shifted to China, a highly regulated economy at the time, that could produce the goods cheaper. But as the regulations come off China's economy, their manufacturing sector follows the rest of the worlds as cost spiral through capitalistic greed getting out of control. And TPPA will now stop them doing it even more. Our Governments are selling out our sovereignty in a big way to American corporate and Government greed.
It is actually the Governments job to create an environment the creates jobs, not the RB. I also suspect that Paula Bennet's plan to pay beneficiaries to move somewhere else is an admission by the Government that they can't get them jobs in the country's largest job market, AK, which means they are seriously failing in their fundamental duty!
You are one of the very few people around who understands that monetary policy will not fix the problems. Nearly 99% of all comments and articles across all media formats in NZ are crusading against the RBNZ as not doing enough to stimulate the New Zealand economy, demanding lower and lower OCR interest rates, while remaining silent in their expectation of fiscal policy
Yet there is never any supporting evidence that businesses will respond to a ¼% rate cut by employing more people and investing more in production.
A reduction in the OCR simply increases the disposable incomes of the indebted with mortgages who may choose to either pay down debt or consume more imported goods.
No gurantees what they will do
As noted the other day NZ businesses have to pay income tax and GST while foreign based multi-nationals pay no GST and little or no income-tax. A huge tax-driven competitive advantage. Thus any reduction in the OCR which increases consumer spending will largely benefit the foreign nationals who have NZ government mandated tax-cost-advantages - in other words subsidies
Compare the NZ response to the AU response
While Bill English held the line on achieving a surplus, the AU government, facing a $40 billion deficit introduced a huge tax stimulus package aimed at driving growth in the small business sector which is the country's largest employer of people
Treasurer made a $5.5 billion small business and jobs package the centrepiece of his budget, as he attempts to revive investment and economic growth
http://www.abc.net.au/news/2015-05-12/budget-2015-small-business-tax-br…
Budget 2015: $20,000 small business tax break explained
http://www.abc.net.au/news/2015-05-13/budget-2015-small-business-tax-br…
Why go slow when you can go fast?
From 1 January 2016, the new law will ensure that when Australian customers deal with an Australian subsidiary or local entity that is integral to the customer’s decision to enter into the contract, those Australian sales will be recognised as Australian income. Therefore tax will now be paid on profits from economic activities undertaken in Australia.
http://www.budget.gov.au/2015-16/content/glossy/tax/html/tax-05.htm
So lets just consider what damage tarriffs can do. When I came here 20 years ago trainers were $180~200 when in the UK I could get them for more like $50~80. So poor people and indeed all NZers were paying a huge surcharge to keep a few hundred at best semi-skilled ppl in employment. On top of that teh NZ manufacturer in effect had a guaranteed cheque from the Govn with no incentive to be efficient or complete. 2nd that money also then isnt spent elsewhere, or worst of all some ppl may not be able to afford shoes. Now that doesnt mean we shouldnt consider such social policies but there are negatives.
"It is actually the Governments job to create an environment th[at] creates jobs, not the RB. " totally agree, I think Labour is just setting up a whipping boy myself.
The Government by and large does not in itself create the jobs. It's job is to create the environment that encourages the creation of jobs. a big difference. I take Steven's point about Tariffs being a fairly crude tool, but what is the alternative? And why was there such a huge difference in price? I note that many products made in the US are significantly more expensive in our shops, much more so than shipping costs would or should suggest. How do we create the environment that leads to the creation of jobs? This is a significant issue for the current and future governments.
Your "how" question on job creation.......Government and bureaucracies have to move their lard butts out of the way!! The trouble is we have a large group of people who are not very knowledgeable or lacking in quality educational/life skills and they hit the panic button at the mere sound of that idea and refuse to have a discussion......preserving and strengthening they same system that gets a countries economy into strife is pure madness but that is what we do.
If all the employment law, H&S law and other bureaucratic compliance went out the window this wee country would be cranking!!
If we all go out and buy a house, the most expensive we can buy we will all have saved a pretty penny.
If we all rent them to each other we can all claim a tax deduction. That will fix the problems of being overtaxed.
Then if we all go and borrow against the house for all the other things we need, we will all be sitting pretty.
Duh, Problem solved.
Most of us are aware of Wheeler's (and most central bankers') dilemma in low interest rates kicking the ball up the hill, as George Soros says. They stoke asset and debt bubbles, while having a fairly indirect effect on consumption. So he needs some other tools as well as targets, and he needs some government mates.
Robertson is correct to point out that the PTA is clearly no longer fit for purpose. Whether the secondary target is employment, current account balance, gdp growth or similar is moot. I personally prefer a current account in balance, but that is not too material.
The tools, and combined fiscal/monetary approach in using them, is far more material.
Bill English seems in conservative simplistic denial whenever he broaches the subject, merely suggesting that inflation is Wheeler's problem.
The world, including NZ, will need a fiscal response, and not a debt fuelled one, as that would be self defeating.
Tax cuts or government spending, funded by monetary expansion seem the only likely route out of the global dilemma.
The problem is a worldwide problem and that is money is now created by debt. A pyramid scheme where the next generation has to take on more debt to basically pay a previous generation's debt (and the interest - as this money isn't created at the time of the initial debt).
My grandparents (Kids during the depression) kept saying don't spend money you don't have and don't take on debt,, but that is exactly what NZ (And most of the world) has done since the 1970s when we became a debtor nation
It was short term view that it was better to fool its people by making them think they are richer, when in fact most are in-slaved to the debt monster (either personally or as a taxpayer)
The burden of debt for each generation is growing and like most ponzis schemes it will eventually failure.
The sooner we accept that we haven't lived in our means for over 40 years, and address that problem, the sooner we may find the path to restore some balance.
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