RBNZ inconsistency

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.

9 replies
  1. Raf
    Raf says:


    Let’s be honest, this has been going on for quite sometime. Bollard mistakenly believed that anyone outside the markets was interested in what he had to say. Everyday people are told not to smoke, drive fast or drunk, spend more than they have, save etc etc etc. I’ve lost track of the inconsistent statements he’s made over the last 2 years.

    I think the people would rather see more action and less talk. The disrobing of the banking officialdom over the last few years has taught people only that their monetary chiefs are as human as themselves and that quite frankly they make exactly the same mistakes.

    Message to Bollard from the famous Mexican gold analyst, Tuco, il cattivo: “if you’re gonna shoot, shoot don’t talk”

  2. Miguel Sanchez
    Miguel Sanchez says:

    To be fair, the RBNZ’s whinge that the economy could be threatened if banks didn’t pass on a small decrease in one particular lending rate was over a month ago (when presenting the June MPS to Parliament), not a week as Eric puts it. Central banks often take their sweet time to see the light, and we should be glad they’re finally starting to.

  3. Miguel Sanchez
    Miguel Sanchez says:

    And if you want to talk inconsistency, check out how Bollard managed to contradict himself in almost the same breath. This is from the Parliamentary report on the MPS:

    “Given that some banks have not passed on the most recent OCR cuts to borrowers, we asked how the Reserve Bank has been applying pressure to banks to reduce their interest-rate margin. The governor said he had talked to chief executives of banks about the wide gap between the OCR and their interest rates, and was considering discussing it with the banks’ boards of directors… [the RBNZ] believed that banks would eventually pass on OCR cuts if the Reserve Bank continued to pressure them to do so.”

    “We noted that competition between banks for savings has pushed up interest rates for deposits. The Reserve Bank was not concerned at this phenomenon, as it believes interest rates should be determined by the market.”

  4. rainman
    rainman says:

    But… many households are incapable of looking after themselves. OK, perhaps not incapable, but certainly not very good at.

  5. Raf
    Raf says:

    Nice. It was interesting at the NZAE Conference that no one could adequately explain how commercial banks actually interacted with the OCR. Given those in charge look like headless chickens one could be forgiven for wondering what the hell was going on.

    Like I said greater central bank transparency globally has only confirmed what many already suspected.

    My suspicions were confirmed when being closely involved with the Stg ERM ejection debacle. The market is way smarter and has bigger resources than any central bank. The central bank mandate and structure has allowed untold riches to be siphoned out of global markets over the last 20 years.

    At some point NZ will need to reassert its monetary sovereignty. I do hope its sooner rather than later because I really love living here 🙂

  6. Eric Crampton
    Eric Crampton says:

    @Miguel #2: http://rbnz.govt.nz/monpol/3683652.pdf was released 6 July. That’s a week ago.

    However, the pricing of floating-rate mortgages appears unusually high over recent months and we believe there is some scope for further reductions in these rates without compromising the viability of this lending.

    It’s true that the big whinge was a month ago. I do find it odd that the same whinge continues a week prior to making the opposite complaint.

  7. Miguel Sanchez
    Miguel Sanchez says:

    Fair point Eric, although the FEC report suggests they received that margins paper on 17 June.

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