Eric Crampton points out that the RBNZ seems quite inconsistent at the moment. Now I have a high level of respect for our central bank, but Crampton is completely right.
How are they inconsistent? They complained that retail banks aren’t cutting interest rates far enough, then they stated that they think household’s need to save more (something that surely requires higher interest rates). As the Bank controls interest rates, the fact that they are saying they should be both higher and lower is very weird.
This inconsistency stems from the fact that the RBNZ is talking about different periods of time. The first concern is based on the short-term. They are worried about unemployment rising sharply, which is a wasted resource, and will thereby reduce national income – paradox of thrift style. The second concern is based on the medium term, they believe that the consumption share of GDP is too high (and export activity is too low) to be sustainable.
What the Bank wants is a shift in the economy from consumption to exports without any unemployment. Effectively, they think debt levels are “too high” and they are blaming this on consumption. I don’t agree and I think if there is any failure it is more likely to be the result of policy failure than “silly households”.
One last note, when the hell did the Reserve Bank become a central planner? Their mandate is to control medium term inflation, not to decide how national income should be divided. They should mention risks, but saying that households are incapable of looking after themselves (which is what this sounded like to me) is going too far.