The Reserve Bank wants to retain its current 1%-3% inflation target in its Monetary Policy Committee remit - but is pushing to remove the current reference in the remit to house prices.
Earlier this year the RBNZ had public consultation on potential changes its guiding remit for the Monetary Policy Committee. The RBNZ has now released details on the outcome of this consultation - in which 1500 people contributed.
The RBNZ has now advised Finance Minister Grant Robertson of topics and areas under discussion for possible changes to the remit, and there will be a further round of public consultation due to end early next year before the matter goes to Robertson for final consideration, probably in April. The changed/renewed remit will then apply till 2028.
Under legislation passed in 2018, there is to be a five-yearly review of the monetary policy Remit. The Remit is provided by the Government and is used to guide the Monetary Policy Committee’s (MPC) decision making in its pursuit of low and stable inflation and supporting maximum sustainable employment.
The first remit was signed by RBNZ Governor Adrian Orr and Finance Minister Grant Robertson in 2019, and then amended slightly at the behest of Robertson to include reference to housing in 2021.
At the moment the current subclause 2(2)(d) of the remit says the RBNZ should assess the effect of its monetary policy decisions on the Government’s policy - which is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.
The RBNZ says that of the submitters that engaged with this part of the consultation, there was broad (but not complete) support from submitters for not including house price sustainability in the remit.
"However, there was a wide range of views around how the RBNZ should consider house prices in its decisions more broadly. For example, one submission noted that house price sustainability should be considered through the letter of expectations instead of the remit. Another submitter argued to instead require the MPC to avoid instability in asset prices more broadly through clause 2(2)(b) in lieu of having clause 2(2)(d)."
In its letter to Robertson outlining subjects for further discussion around the remit, the RBNZ says it believes "that the remit advice should include a consideration for whether clauses 2(2)(d) and 2(3) should be removed and reflected elsewhere, such as the letter of expectations. However, the remit advice should not include a discussion on any expansion of this clause (i.e. making clause 2(2)(d) a stronger consideration for MPC)."
On the inflation target the RBNZ has advised Robertson that "there is not enough evidence to suggest changing from the 2% target (1%-3% band)".
The RBNZ said there was general support in the public consultation for retaining the Consumer Price Index (CPI) as the price stability measure.
"However, many submitters from the wider public wanted more weight on house prices in the measure."
Another area for debate in the remit has been the maximum sustainable employment target that was introduced into the monetary policy targets by this Government.
In its letter to Robertson the RBNZ suggests that weighting or preference between objectives Introducing a hierarchy of objectives (i.e. stating that the MPC should put greater focus on either price stability or maximum sustainable employment) "could mitigate risks around competing price stability and MSE objectives".
The RBNZ said guidance for achieving price stability "could provide more (or less) flexibility for MPC strategy to manage the trade-off between objectives".
"We will consider matters such as the width of the target band, whether an explicit midpoint should be retained, the horizon of the price stability target, and the treatment of transitory events."
RBNZ chief economist Paul Conway said the central bank was pleased with the feedback received.
"We’re grateful for the valuable views and insights raised in the public submissions, including some expert perspectives which we will factor into the next stages of our work on the Remit review."
In a letter back to the RBNZ, Robertson said he agreed with the proposed set of topics the RBNZ intends to consider in its MPC Remit review advice.
"I expect the RBNZ will produce sufficient documentation and engage with the public in a manner that promotes a robust and genuine conversation about possible improvements to the MPC Remit."
38 Comments
Trying to keep the housing market high is what I suggest as being a losing proposition as it keeps today's kids out of the market and keeps housing unaffordable for too many. Removing LVRs allows too many to buy with too little deposit. It's far too early for that.
"Managing inflation and supporting asset speculations are at odds with each other" Not at all, interest rates have been dropped for years to try to lift inflation to around 2% AND this has resulted in "supporting" or rather massively increasing asset values.
"Drop any protective housing mandate" So no more LVR's or possible DTI's. I'm really surprised you have changed your mind 180 degrees today and that you are in favour of house prices rising again.
You could say inflation AND increased asset values are both sides of the same coin. You could have falling money and flat assets, or flat money and rising assets and they'd both mean the same thing.
I think he's saying trying to lower inflation while preventing house prices from falling run against each other, because you have to raise interest rates to lower inflation but you have to lower interest rates to support house prices.
Thus instead of the central banking narrative that lower rates lead to higher growth, the empirical and verifiable reality is that higher growth leads to higher rates and lower growth leads to lower rates. If rates are the result of growth, they cannot be the cause.
This raises some new questions. Firstly, if it is not interest rates that drive growth, what then? And secondly, why do central banks keep insisting that they are using interest rates as their main monetary policy tool, when this is simply impossible? Recently, central banks have been lowering rates, while proclaiming that this is a measure to stimulate the economy. But the empirically verifiable fact is that they lowered rates, because economic growth has decelerated. Falling growth means interest rates must follow down. And what has been the role of central banks in the growth slowdown preceding the lower rates? We may presume that they had not used their vast powers to engineer economic growth – powers they worked hard to obtain in previous decades, in the form of independence with little meaningful accountability.
Instead of unravelling this mystery, central bankers have been making counter-factual assertions about the causation of interest rates and growth. Yet we know them to be in possession of thousands of highly trained staff and the best quantitative data sources on the economy of anyone. Since the hypothesis of complete incompetence or irrationality is a last resort, it stands to reason to adopt the working hypothesis that central banks have employed these counter-factual assertions on purpose. Two reasons come to mind: Firstly, they are using the interest rate narrative in order to suggest that they are adopting beneficial policies, when this may not really be the case. Secondly, they may in this way be able to distract public attention from the true causal relationships in the economy. In this case, a far less benevolent interpretation of central bank policy becomes suggestive.
As Forder (2002) has argued, obfuscation has served central banks particularly well since they have become so all-powerful: the danger for them in this era of unprecedented powers is that the general public may simply (and rightly) link bad economic outcomes to bad economic policies adopted by central banks, not to the – now far less powerful – governments. In other words, since almost all economic keys have been handed over to the central banks, one can reasonably expect them to be blamed for the economic mess that is such a recurring feature of economic policy during those decades of ever greater central bank power. As a defense mechanism, central banks could be expected to argue that they are doing all in their power to help the economy, while pinning the blame on other actors. But for this to work, observers need to be misinformed about what the true levers of monetary policy are.
A desire by central banks to misinform would explain why they have spent vast resources on “economic research” – pseudo-scientific writings that are often far removed from reality, but are designed to place any blame for the terrible economic performance that they have been responsible for on other actors – preferably the government, fiscal policy or ‘irrational’ and ‘uneducated’ ordinary people who are looking for ‘easy answers’ or seeking ‘populist explanations’, while anyone contemplating the possibility that big banks and central banks might not always look after the public interest and instead might collude in order to put their own objectives first is identified as a ‘conspiracy theorist’. In other words, the “economic research” produced by central banks is usually of a kind that at best looks like political PR to objective observers, if not outright propaganda. Link
On our planet earth – as opposed to the very different planet that economists seem to be on – all markets are rationed. In rationed markets a simple rule applies: the short side principle. It says that whichever quantity of demand or supply is smaller (the ‘short side’) will be transacted (it is the only quantity that can be transacted). Meanwhile, the rest will remain unserved, and thus the short side wields power: the power to pick and choose with whom to do business. Examples abound. For instance, when applying for a job, there tend to be more applicants than jobs, resulting in a selection procedure that may involve a number of activities and demands that can only be described as being of a non-market nature (think about how Hollywood actresses are selected), but does not usually include the question: what is the lowest wage you are prepared to work for?
Thus the theoretical dream world of “market equilibrium” allows economists to avoid talking about the reality of pervasive rationing, and with it, power being exerted by the short side in every market. Thus the entire power dimension in our economic reality – how the short side, such as the producer hiring starlets for Hollywood films, can exploit his power of being able to pick and choose with whom to do business, by extracting ‘non-market benefits’ of all kinds. The pretense of ‘equilibrium’ not only keeps this real power dimension hidden. It also helps to deflect the public discourse onto the politically more convenient alleged role of ‘prices’, such as the price of money, the interest rate. The emphasis on prices then also helps to justify the charging of usury (interest), which until about 300 years ago was illegal in most countries, including throughout Europe.
However, this narrative has suffered an abductio ad absurdum by the long period of near zero interest rates, so that it became obvious that the true monetary policy action takes place in terms of quantities, not the interest rate.
Thus it can be plainly seen today that the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky.
The banks thus occupy a pivotal role in the economy as they undertake the task of creating and allocating the new purchasing power that is added to the money supply and they decide what projects will get this newly created funding, and what projects will have to be abandoned due to a ‘lack of money’.
It is for this reason that we need the right type of banks that take the right decisions concerning the important question of how much money should be created, for what purpose and given into whose hands. These decisions will reshape the economic landscape within a short time period.
Moreover, it is for this reason that central banks have always monitored bank credit creation and allocation closely and most have intervened directly – if often secretly or ‘informally’ – in order to manage or control bank credit creation. Guidance of bank credit is in fact the only monetary policy tool with a strong track record of preventing asset bubbles and thus avoiding the subsequent banking crises. But credit guidance has always been undertaken in secrecy by central banks, since awareness of its existence and effectiveness gives away the truth that the official central banking narrative is smokescreen. Link
I would argue for it to be lowered to no more than the 0-2% range, which was the range initially set some 30 (or was it 32?) years ago when explicit inflation targeting was first introduced. Part of the problems we now have are a direct result of purposefully pumping up inflation, with that now having got out of control.
KeithW
I can see a scenario where, in 2023, economies retract into recession but inflation is still well above the target of max 3%. What then? Do RB's continue to tighten monetary policy further? I personally don't think so, if I'm right, then we might have to accept to live with inflation in the 3 - 5% range...
Said that a few weeks ago Yvil, we will just have to live with inflation, which is ultimately what the RBNZ wants anyway as it eats the debt created away. Do you crash the housing market and the entire economy or pay another $1 for your bottle of milk ? The answer is obvious.
Yvil,
This is the conundrum that I foresaw way back in June 2020 when the LSAP/QE programme went wild. And that is why none of the alternative outcomes is going to be pleasant. But ongoing inflation of 3-5% would be highly distortionary and lead to ongoing major mis-allocation of resources. And that is where NZ cannot afford to be.
KeithW
It's the employment mandate that cooked our goose in 2020. Grant Robertson wanted to palm off the job of fiscal policy onto a handy scapegoat. Monetary policy is a very very broad brush and employment is not a good fit to be managed this way, especially when needs are industry specific such as hospo and tourism as it was then. Specific targeted fiscal support for these industries would have allowed the OCR to remain higher were RBNZ not required to consider this mandate, that's a simple fact. As for the wage subsidy, corporate welfare that once again was way too accessible and spendthrift despite me personally benefiting. Like most business owners we simply could not believe our good fortune from a labour govt. That money is still washing arround the economy like little piggy going to market.
Something for future textbooks to ponder over for sure.
The RB wants "Robertsons housing interference" bullshit clause removed because...
1. He can see how rooting kiwis major asset/investment base (thier home)will ruin the economy and slow the spending as kiwis feel poorer
2. Having the GR " screw the hard working Kiwis by killing their biggest asset in order to appease the losers and street sleepers" clause 2.2 completely compromises the RBs ability to drive monetary policy properly.
3. They want to put the responsibility for the housing cluster fu%K back on fatty boy GR.
4. The RB can see, with slowing house sales and a huge amount of new housing in the pipeline, that there is going to be a huuuge housing market crash starting around March 2023.
5. THe experts at RB are also no longer prepared to play God with housing
Now all Adrian Orr has to do is remove the racist Maori clause from his Jahitler induced mandate.
"kiwis major asset/investment base (thier home)"
"killing their biggest asset"
This narrative/story over the last 20 years is the reason we're at this point now. Turning homes into financial assets/investments is probably one of the dumbest things human's have done and now we're reaping what we've sowed. If we're going to use economic terms it's an expense of time, energy and resources. It's a liability in many respects. For human and community psychological and emotional wellbeing it's a fundamental item that should not be driven by scarcity or financial BS. If we weren't spending so much on homes, trying to make money and recoup our 'investment', we'd collectively have more to spend in the economy and not have to "feel" rich or poor. If the economy depends on overinflated house and asset prices, there's something fundamentally wrong with the economy and society.
As for the rest of your comment, "appeasing the losers and street sleepers", I think you've swallowed some bad juju there.
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