This is a point where a lot of economists strongly agree with you IMO. However, I’d lay the blame at the feet of political pressure for setting that rate in the PTA – not on the Bank for following their PTA.

“One wonders if the bank is starting to suspect that its extreme inverted yield curve policy of most of the last decade was a failure.”

There is an undeniable issue with a strongly inverted yield curve. In one sense this should be telling us that people expect the economy to slow – that is definitely how people felt in 2006 (and as a result the Bank might have felt this track was appropriate to smooth economic activity).

But of course, by setting the 90 bank bill track the RBNZ has some control over the shape of the yield curve, and on top of this we knew inflationary pressures were not slowing during this period – so policy would need to be tight (in this case they focused on the current bill rate as an indicator of the tightness of policy – which may have been mistaken). A massive export price spike, with the associated TOT increase, made policy a lot more difficult in this case.

There are two things here:

1) Should the Bank have forecast an upward sloping 90 bill rate track
2) Did the Bank need to introduce prudential regulation to reduce the impact of lower international rates on the domestic yield curve.

There may have been mistakes in how they performed this type of policy here – that is hopefully something they will analyse and discuss as you say.

” The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices.”

This Monetary Policy Statement shows the extent that the Bank feels free to ignore their Act, by choosing to follow a policy target of 1 – 3 percent that is not consistent with the Act: inflation of 2% per annum implies a five-fold increase in prices over a lifetime, which is hardly consistent with stability in the general level of prices. At the end of the MPS they justify the cut partly on the basis that underlying inflation of 1.6 percent is now seen as modest. Laws, it appears, are just for little people, not ministers and their important bureaucrats.

The MPS is also notable for saying that monetary policy is likely to be more effective in the future than the past because there is a positive yield curve, so that most people with mortgages are on floating rates that will rise quickly when tightening occurs in the future. One wonders if the bank is starting to suspect that its extreme inverted yield curve policy of most of the last decade was a failure. This would be an interesting development; perhaps the bank is wishing to fess up that its conduct of monetary policy in 2006 – 2008 (highest short term real interest rates inthe world from January to June 2008 despite being in recession, remember) may have been a contributing factor to the depth of the recession.

Andrew