RBNZ’s 50bp hike

The RBNZ increased the OCR by 50 basis points to 1.5% – to someone from three years ago that level might not sound strange, but just take a look at this 10 year government bond rate track. Highest 10 year rate since 2017 and, given when the cash rate is, an indication that higher average rates are expected in the future.

The last time there was a 50bp increase was May 2000. If you want to understand what was going on there take a look at inflation and the exchange rate during that period – a drop in the dollar was stimulating activity while inflation was high and climbing, so the Bank responded.

The exchange rate isn’t doing that now, but the world (and NZ) opening up post-COVID is filling that role – while core inflation is high, and headline inflation is at levels a lot of people have not seen before. In this way, the Bank is tightening – makes sense, and I trust they’ve worked it all though.

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Firms are greedy, but that isn’t the reason for inflation

With prices rising an increasing number of people are looking for a scapegoat. Fairly “obviously” the blame should be on those who are increasing prices – namely firms. This outbreak of greed is then being used as an explanation for why firms are increasing prices, and the suggestion is that – instead of cutting government spending or increasing interest rates, the solution is to break up monopolies.

Now I have no problem with breaking up monopolies, and I’m a huge fan of clear competition policy. But this isn’t going to deal with the “inflation” problem we are talking about. Let’s chat about it.

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Narrative, communication, and monetary policy

In a recent article on interest.co.nz I chatted about monetary policy in New Zealand. As we’ve noted in the past, measures of price growth are pretty elevated in New Zealand – however, I make the case that RBNZ actions have been relatively appropriate (given uncertainty and the size and nature of the supply/income shock) but that it is their communication that lets the team down.

The comments below the article fundamentally think I’m misguided – and that the Bank has dropped the ball more fully. Blanchard also has an excellent post on the US case which may be also be used to be more critical of the policy operation of the RBNZ.

Although I am constantly misguided and wrong, there are two things I would raise here to defend my own position:

  1. With external shocks there was always going to be an “income loss” – fiscal and monetary policy determine how this is distributed. The Bank can’t make this type of “cost of living” crisis and related loss go away – it can only ensure that the transition back to their clearly communicated inflation target is “least cost”.
  2. Criticising communication is a big critique of the RBNZ – managing inflation expectations is their core job.

There is no point bagging an institution for things that are not their fault – but more transparent and clear communication about monetary policy, instead of every other issue that the Bank seems obsessed with at the moment, is needed. The current lack of communication about narrative/forward looking guidance about how the mandate will be achieved, combined with forecasts that arguably point to a general failure of the mandate, is a problem. If this type of failure doesn’t lead to changes in how monetary policy is communicated in the current environment, or lead to a situation where the responsible people at the RBNZ face consequences for this failure, then inflation expectations are going to become unanchored.

And I would argue that the nature of the comments on my interest.co.nz article indicate that people’s faith in the RBNZ to manage inflation expectations is frayed – and their reaction reinforces the importance of the very communication issue I am pointing to!

If you feel compelled to attack the Bank further or launch into an impassioned defence, then go for it in the comments. I just want good policy communication and evidence-based policy that supports the wellbeing of New Zealanders – something that both the Bank and private sector commentators have a responsibility to up their game on, given the quality of the current discussion of New Zealand’s “cost of living crisis”. (Noting that a number of NZ economists – as shown in the comments of this piece – are trying to clarify what is going on)

Fiscal policy itself matters here, and clearly understanding the trade-offs associated with fiscal policy choices – at a minimum through the necessary monetary policy offset, but also through the distributional implications and consequences on growth and productivity – is another important area for discussion. Let’s leave this for another time though.

Price controls and inflation – is this time different?

Note – this was going to be a video, but the day after writing it up I already saw better posts on it here and here and also here.  However, the text I wrote is kept below as it adds an occasional additional point – so feel free to read those posts and this one 🙂

The increase in prices in the US over the past year has been generating considerable angst – and comments that “price controls are needed to deal with inflation, due to corporate greed”.  This has led to lots of people saying things on Twitter, with individuals who different people may see as authorities taking very different views on the topic:

Mariana Mazzucato on Twitter: “Excellent by ⁦@IsabellaMWeber⁩ on the real cause of inflation and what to do about it. https://t.co/9epjBGOIpg” / Twitter

Aaron Hedlund on Twitter: “Did I miss the macroeconomics lectures where they teach that antitrust (https://t.co/EWD1CjAOpp) and price controls (https://t.co/oskR2ATzpu) are effective inflation-fighting strategies, or is economic illiteracy just running rampant again in some corners of the popular press?” / Twitter

How about we step back from the name calling to try to think about what these terms mean and what people are saying – as in the end it is likely people are talking a little bit past each other, and when that happens the rest of us can just get confused!

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ECON141: When cash rates go negative

Last time I discussed how the cash rate influenced the interest rate.  But what happens when the cash rate goes negative?  This is the focus of today’s post.

After recent discussions about “negative interest rates” across Australasia I thought it would be useful to talk about how these rates appear mechanically at a high level (in terms of financial system operations).

In class (and Gulnara’s posts here) the motivation of why negative interest rates might be appropriate in a policy sense was raised.  Furthermore, she did a great job of noting that it is unlikely that negative rates will cause additional savings (as some have claimed) and so theoretically we can continue to think about our investment model with negative interest rates.

For this post we will assume that the central bank is trying to influence interest rates towards a level that will “close the output gap” or “push Y to its sustainable level” and achieve their inflation target, and it just happens that this interest rate is negative.

The wrinkle is that we achieve this negative interest rate through a settlement cash mechanism – so we need to ask, how do negative rates in settlement cash accounts translate into lending and actual interest rates?

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ECON141: The cash rate and interest rates

Hi ECON141 students.  Unlike ECON130 there isn’t weekly material on this site, with lecture notes being provided instead.  However, I will add the occasional piece to help give what we are doing some context – so that it can be used to understand what is currently happening.

In that vein, today we are going to talk about how the central bank does influence the nominal interest rate in New Zealand (as compared to our still useful discussion of bond purchases in class).  By doing so we will also be able to ask about “negative interest rates” in a later post.

It should be noted that none of the content I cover here is assessed – you will be assessed on what we do in class and in the lecture notes and readings. Instead the purpose of this is to add a bit more detail about things for students who are interested.

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