By Rodney Dickens
Alan Bollard’s decision to step down as governor in September has opened the doors for debate about how monetary policy is operated and speculation over who will be the next governor.
The following are what I believe to be the most important issues:
1. The need to avoid a new governor embarking on a monetary policy experiment like Bollard’s misguided and extremely costly “go for growth” experiment.
2. The need to recognise that interest rates are extremely powerful drivers of economic cycles. This means that excessive adjustments in the OCR imposes unnecessary and costly volatility on the economy and especially on interest rate sensitive industries like residential building.
3. The need to recognise the futility in the forecasting-based approach the RBNZ has used to make OCR decisions and monetary policy decisions before the birth of the OCR in 1999. The RBNZ needs to stop pretending it can predict the future with the degree of accuracy required to make quality, proactive adjustments in the OCR. Lacking the ability to forecast the future with any degree of accuracy the RBNZ resorts to reactive adjustments in the OCR that add to rather than reduce volatility in the economy, especially for interest rate sensitive industries.
4. The need for the RBNZ to focus more on assessing the neutral level of the OCR (i.e. the level consistent with keeping inflation low on average over the medium term) and on keeping the OCR relatively stable at around the assessed neutral level.
5. The need to remember that the primary reason for an independent central bank is to stand in the way of politicians abusing power (i.e. stop excessive use of taxpayers’ money to buy elections).
This Raving discusses these issues, some of which I have dealt with in detail in past Ravings and other reports.
Based on the insights provided by the brief discussion of these issues I make some recommendations (e.g. the type of new governor required, whether the governor or a committee should be responsible for OCR decisions).
* Rodney Dickens is the former Head of Research at ASB and the current the Managing Director and Chief Research Officer at Strategic Risk Analysis. He can be emailed at rodney@sra.co.nz
More of his research can be found on his website, which is www.sra.co.nz
3 Comments
I find I must agree.
But nothing will change.
NZ has an economy built on poor decision making going back decades.
Without an endless supply of cheap credit the country would grind to a depression halt.
Which is why you need to go read this:
As to the appointment of a replacement for AB...why not be honest and appoint BE...he's calling the shots for the private banks!
I have just read in the Herald that house listings are at an all time low for January 2012 , and house sales are up 22% by number in Auckland.
So , as I have always believed would happen , the low interest rates ( OCR) have done nothing but stimulated an already overpriced housing market .
Wait until interest rates go up , as they must . Then there will be tears and sniffing runny noses
Abolish urban growth constraints and grant "freedom to build". That will take care of house prices.
AND loosen monetary policy targets to allow a brief period of high inflation to wipe out house price inflation in REAL terms without leaving people in negative equity in dollar terms.
Something like this happened in the 1970's. House prices spiked due to stupid Kirk Govt policies easing credit but not freeing up housing supply. Then there was a few years of high inflation under which house prices did not inflate as fast as incomes and prices of goods, eventually resuming the historically "3X" normal relationship with incomes.
I learnt this from YOU, Rodney - you called it "washing away our housing bubble sins in a tide of inflation". I think it is the best idea I have heard yet for dealing with the aftermath of an insane regulatory-induced bubble. Provided growth constraints are abolished so that the monetary easing does NOT just keep pumping the bubble bigger.
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