Deputy Governor Christian Hawkesby says the Reserve Bank's (RBNZ) Monetary Policy Committee might have taken a different stance in May if the economic activity forecasts had been more accurate.
In May, RBNZ’s forecasts had anticipated 1% GDP growth for the calendar year. But by August, that had been revised to a 0.4% contraction, with a deep decline in the June quarter.
The RBNZ chose to cut the Official Cash Rate from 5.50% to 5.25% last Wednesday partly in response to these lower economic activity forecasts.
Another key factor was that businesses have been adjusting their wage and price-setting behaviour more quickly than anticipated in response to the low inflation environment.
Speaking in the latest episode of interest.co.nz's Of Interest podcast, Hawkesby said the committee would not have adopted such a hawkish stance if these data points had been available during the May meeting.
“The uncertainty was around the speed and intensity that [tight policy] would be felt in the economy … Since then we've had a whole heap of evidence on the downside playing out”.
Uncertain
He said the OCR projection, published in that Monetary Policy Statement, was “flat with a slight upward bias” but with “big uncertainties” that were outlined in the record of meeting.
However, weaker than forecast GDP was not cited as a risk in the May meeting record, and uncertainty about price-setting behaviour was described as an upside risk. The committee agreed that interest rates need to “remain at a restrictive level for a sustained period.”
The chapter on economic projections included a disclaimer that said there was “significant uncertainty” about the assumptions used in the baseline forecasts. But the possibility of easing rates in the near future was not mentioned in the 60-page document.
This shift led some economists to describe the August decision as a 'U-turn.' But there was consensus that it was the correct move, given the clear signs of a weakening economy.
Stay off the track
Hawkesby also said there had been a “misconception” that the central bank was going to keep the OCR at 5.50% until it saw inflation below 3%.
“You need to work on the basis that monetary policy is going to work. You don’t have to wait until the number is within the band, you just have to have confidence it will settle there.”
However, the May monetary policy statement projected the OCR would remain above 5.50% until September 2025, by which time inflation would have been below 3% for a full year.
This was true in the February 2024 and November 2023 monetary policy statements as well.
Hawkesby said the OCR track that published in each statement often gets overanalyzed, without enough recognition that it is based on a set of assumptions.
“There's something quite peculiar that happens when someone sees a line on a chart, or they see a number in a table, it has this sense of being real and factual,” he said.
“My advice to people would be to focus more on the record of the meeting than the OCR projection."
47 Comments
The RBNZ has been tasked with doing what The Government(s) are too afraid to do themselves. i.e. Enact meaningful change to our economy. Much better the pollies leave it to Adrian & Co to take the flack, than them. I wonder what Chris' career prospects are now?!
"House prices need to fall at least another 16 percent to become anything like affordable.....Infometrics chief forecaster Gareth Kiernan said it was a "politically brave" statement for Bishop to have made."
https://www.rnz.co.nz/news/business/521022/house-prices-need-to-fall-a-…
"Much better the pollies leave it to Adrian & Co to take the flack, than them"
Politicians playing the game of politics with their political rhetoric. Blame someone else for the bad outcomes, quickly claim credit for the good outcomes / news even if they weren't the cause. Most voters don't understand the popularity contest game that politicians are playing.
1) She took some credit for the economic shift.
"This government has delivered on its promise to Kiwis - our careful and deliberate plan to get on top of inflation is working, and we are seeing the green shoots of recovery."
2) mud slinging at their opposition to make themselves look good in the eyes of voters.
Luxon blamed the economic difficulties on the previous Labour government.
"Essentially, poor economic management and financial discipline created rampant domestic inflation and therefore rising interest rates, which have squeezed family and farm budgets. And that squeeze has driven the country into recession and our unemployment is understandably rising," he said.
https://www.rnz.co.nz/news/political/525150/cash-rate-cut-pm-finance-mi…
When bank lending on housing is 70% of total lending, housing is your economy.
As Cam suggests this may be problematic, if their are further bigger falls. A 10 year stagnation in house prices is a win here, if the RBNZ can engineer it, however I think rates and insurances etc will also track above inflation, meaning affordability will not change as much as many desire. Meanwhile the fiscal spending to achieve this would have to survive multiple election cycles, of people who are pissed off and going nowhere fast. Its a good fairy tale, but ignores game theory.
This also assumes no global black swans.
I agree and note we are now in two gap periods, first the gap between inflationery rate/Insurance/energy price increases and the effect on costs going forward, secondly the gap between a newly re fixed mortgage at a much higher rate and the effect of decreased discretionery spending. If this doesn't result in a continuing recession of greater length and depth plus more unemployed then I will acknowledge the earth is flat and the moon is made of green cheese.
Correct. I OIA'd the RBNZ model after the November 2023 MPS, which forecast decent growth through 2024 (lol). This forecast was so obviously nonsense that I suspected they were relying on some fantastical assumptions. The rest of the contextual data in the MPS clearly signalled recession - as did the trends on the metrics that matter (bank net lending, planning govt deficit spending, current account deficit etc). Obviously, RBNZ didn't share their model with me, but they did confirm that they do not consider forecasts for bank credit creation as a factor in their forward predictions. This tells you all you need to know - muppet models. They might even be relying on some loanable funds BS. Awful.
Sorry, I don't buy this.
Blind Freddy could see that NZ inc was cooling rapidly in the lead up to that set of forecasts and the RBNZ completely blindsided the market (apart from ANZ who have proven to be equally loony on their hike call).
Either Hawkesby and Silk are as bad as Orr, or they didn't have the minerals to stand up to him. Either way, not a good look. I'm not against rates being higher for longer, but such an about face in forecasts in such a short period is not the work of a high-performing central bank.
So the MPC are failing at their job and blaming poor analysis and forecasting? It's almost like the model of paying the out-of-touch exec rockstar salaries and the analysts peanuts isn't working. Orr being on twice Powell's pay should be a huge wtf moment for any taxpayer.
Cut exec pay by 70% and use the savings to attract some top analysts.
You're on point about management bloat. There are 27 directors among 510 employees at RBNZ. In other words, one in ever 18 employees is a director, the kind of bloat which is unheard of in the real economy.
About half of the directors are in non-core roles such as DEI, info security and governance.
That's a somewhat ignorant observation. Directors can be senior technical staff or long tenure staff - not necessarily management bloat. I would expect RBNZ to have a number of highly educated and trained (PHD) staff who are not "middle management" people leaders but seneior subject matter experts.
A factor previously not in play is fear by the Pollies Elites and Bankers of what reaction by a population being unable to eat/work and have a roof over their heads. Looking at the widespread protests and riots - Ireland (37 burnt out premises for unwanted invaders) UK and much of Europe, so better to reduce interest rates and prevent mortgagee sales and a potential Bank crisis and they note the sucessful assassination of European PMs and the Unsucessful attempt on Trump and fear the idea may spread. The problem its too little too late to fix years of free flow migration of ethncis who refuse to integrate. When Govts /Police fail to solve a problem and attack the citizens whilst allowing other protests to riot on the people take over and then it gets very ugly.
The biggest issue was the 'uncertainty' at that time in May. New government, tax cuts, slashing spending, etc. etc.
Rather than go back to 'first principals' - as Jfoe, Renney and others do so well - they became blinded by 'maybes' and just made stuff up, hedging foolishly at every turn. Classic 'groupthink'.
What they should have done is what all good accountants and economists do - back check against previous similar scenarios and say, "That can't be right! For that to happen, some huge change must have occurred ... But none has. We must be wrong."
Shows you what echelon of society the RBNZers exist in - high up enough that they are blind to day to day reality. Those of us in the real world could/can all see demand dropping sharply, huge rises in unemployment all around us, large numbers of productive people leaving for better oppourtunities overseas as NZ decided austerity and eeking out a bit more from overloaded systems was possible. For instance at my work place (building new tech systems for customers) we have had about 20% of our workforce leave in the past 6 months - many due to cancelled projects by both private and public sector orgs who have decided to stop funding mostly urgent upgrades. Add to this cancelling infra projects and generally throwing babies out with bathwater and we have a huge economic hole, with lots of indicators its getting really bad for most with overloaded social/donation services (KidsCann, foodbanks, church groups etc).
But RBNZers eating wagyu at Logan Brown over their bottles of charblis don't see any of that of course? (actually a mate said he saw Orr in the exclusive Wellington club when he was invited for drinks once, along with a bunch of other big wigs, so I guess they are insulated by not having to mix with most of us? )
What’s the trajectory?
China’s high growth trajectory was taking off well before Xi came to power
I was impressed by China, but they have a lot of problems if you dig a little beneath the admittedly impressive surface. I also saw some shambolic ineptitude when I was there…
he has suppressed dissent and I don’t think that ends well, and that together with his arrogance was the point of my Orr comparison
The RB is continuing its mediocre performances & is now blaming the slow & poor third party data for their about-face. This chapter began in early 2020 but their mediocrity pre-dates this [the August 2019 rate reduction comes to mind] all on Mr Orr's watch funnily enough.
On the issue of senior central govt remuneration in NZ - it has reached obese levels & is sickening to read about, especially when compared to their so-called performances. Today's 60,000 plus state employees deliver remarkably little value for the nation as a whole. You can see this in just about every govt departmental direction you care to look. Health, education, policing & social spending are all currently sub-prime & very obviously so. State housing is a hot mess. MBIE is everything but what their title suggests.
My estimate is the quality of their output is closer to about half [50%] of what they are currently compensated. And the higher you go the more it is so.
60000 state employees?.. really, it must be nearly 500000+, when you include teachers/ teacher aides,school administrator (125 k) doctors,state paid specialists nurses, hca's , hospital staff(150 k), and on it goes,, someone must have the numbers, is it one tax payer paid state salary for 5 private sector wages/ salary earners? It's vastly more bloated than 60 k departmental direct, staff. Surely
I tell you what is a waste of 'taxpayers' money' - the $10bn a year siphoned off bank profits, the 35% profit margin in energy supply and real estate, the whole bloody advertising sector, doggy daycare, most early years education, all privately owned jetskis, cars with engines above 2 litres. All the mathematicians employed in the finance sector (or, even worse, as economists). I could go on. We waste an incredible amount of energy and time on dumb stuff.
There are a few explanations for RBNZ appearing to be totally clueless. I suspect it is a combo of these three...
- Their models are based on macro theory that is so deeply flawed it should be thrown away (loanable funds, savings drive investment, inflation expectations etc)... and they know it. They are therefore operating blind - waiting for the data to tell them what is going on, rather than taking action in advance. As I commented above, I know they are not focusing on the metrics that matter (eg net bank lending) - so how do they have any clue about what will happen next? How come an old engineer like me has consistently made better medium-term GDP forecasts than millions of dollars worth of central bank economists?
- The MPS statements and serious stares at the podium etc are performative nonsense designed to keep conditions tight until the last minute. So, they are basically hoodwinking everyone. The boys that cry wolf.
- They need to maintain the illusion of having independent monetary policy - but the level of offshore savings in NZD / Govt Bonds means that they basically have to follow the Fed. If they moved before the Fed signalled a move, the dollar would crash and they would be forced into corrective unconventional action that they would find deeply upsetting.
...RBNZ’s forecasts had anticipated 1% GDP growth for the calendar year. But by August, that had been revised to a 0.4% contraction...
That's alarming mission creep. Very deliberately RBNZ only has one monetary mandate, that's price stability and the way we measure it is CPI not GDP.
Dan,
nice try, there was another meeting between May and August, and it does talk about the possibility of fiscal contraction post budget. Appreciate you need to get clicks and this narrative is red meat to most of the people in the comments but saying that that this is a u turn or flip flop and has come out of the blue is a bit sensationalist
https://www.rbnz.govt.nz/hub/news/2024/07/ocr-5-50-inflation-approachin…
the GDP figure swing is where you should be asking questions, and that track is forecasted by Treasury who had all of the information on the fiscal plans steaming from the budget and should have modelled the likely implications. Unless they were restricted from this work stemming from the lack regulatory impact analysis from all of the changes in policy? https://www.rnz.co.nz/news/political/504272/government-rocked-by-second…
I posted a comment against David's suggestion that future looking statements from the RBNZ should less specific (see here.) I wrote the comment after pondering David's suggestion over the weekend (and before seeing this article). It reads:
Beg to differ, David. And vehemently so.
The mandarins at the RBNZ are employed to 'look forward' using the data they have and adjust monetary policy based on their view of the future economic state. These forward looking statements and predictions becomes the primary mechanism for us - NZ Inc. - to gauge whether the RBNZ is doing a good (or terrible) job.
As has been said many times, economies are like oil tankers. To get them to change direction around dangers and obstacles, must be done months, quarters, even years, in advance.
If you remove this requirement - documenting their current understanding and predictions - you hand these expensive and highly paid people a 'get of jail free card' where they can blames all sorts other factors, that they should have foreseen, but didn't (even though it was blindingly obvious).
... As - surprise, surprise - they are doing now. May’s hawkish stance hinged partly on incorrect GDP forecast, RBNZ Deputy Governor tells the Of Interest podcast
(You'll notice the link immediately above is to this article. The blame game starts. Alas for the mandarins at the RBNZ, many of us saw the same issues with Treasury's forecast, and Jfoe went so far as to quantify them in explicit detail. Why didn't the RBNZ?)
"Hawkesby also said there had been a “misconception” that the central bank was going to keep the OCR at 5.50% until it saw inflation below 3%."
Can all you pub-economists that believe central banks must not reduce rates until inflation is within range TAKE NOTE. Read the quote again.
The misconception must die. It has never been the case. EVER!
Put simply, while the OCR is above the neutral rate (i.e. a rate which is neither stimulatory, nor contractionary) the economy will contract. The rate of inflation adjusted contraction is usually a ratio that grows more significant (has more effect) the closer the central bank gets to the neutral rate.
For example, let's assume a neutral rate of 3%. I.e. When inflation is at 7.0% and the CB rate is at 6% the CB rate is contractionary, the economy will contract, and inflation will come down. But when inflation is down to 4%, but the CB rate is still at 6%, the economy will contract much, much faster, but inflation will continue to come down at about the same rate as it was previously.
As an aside, when the RBNZ says, you have been under a "misconception", can anyone think where that "misconception" might have come from? Hint: who will make lots more profit if lenders think rates will stay higher for longer?
"My advice to people would be to focus more on the record of the meeting than the OCR projection."
Some of us do, Christian.
That's why some of us knew what the MPC said in May was nonsensical. We looked at the MPC's and Treasury's assumptions and concluded that completely the wrong conclusions were being drawn from both the current and historical data.
It still staggers me that back in May, both the MPC and Treasury thought NZ Inc. would magically behave differently this time to every time before.
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