RBNZ engineering our next recession

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Forums › Finance and wealth management › RBNZ engineering our next recession

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Ultimate Geek

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#3000986 24-Nov-2022 17:44

Technofreak:

Looks to me that the government overheated the economy with the poorly targeted spending during Covid and the Reserve Bank is the one playing "Bad Cop" to reign things back in.

That is wrong.. the RBNZ overstimulated and is now having to reverse.. I don't think Govt spending had a material impact.

RBNZ should have lowered interest rates to 2%.. but implemented the tool to require banks to test new loans at 8%

That would have halted the property speculation/inflation

Handle9

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#3000993 24-Nov-2022 18:09

johno1234:

Handle9:

Nope. The primary job of the reserve bank is the stability of the financial system. They always had lots of jobs.

Even if domestic inflation was at zero the reserve bank would be outside the inflation target due to the global inflation situation. It’s not just one factor causing it and certainly not just government spending.

Recessions are necessary and unavoidable. They cause a lot of pain but it is what it is.

From the RBNZ, verbatim: https://www.rbnz.govt.nz/monetary-policy/monetary-policy-tools

"As the Reserve Bank of New Zealand – Te Pūtea Matua, our mandate is to create the condition that promote full employment and maintain the purchasing power of your money into the future."

That is the new, dual mandate.

We have domestic (non-tradeable) and imported inflation. The RBNZ can influence the former.

https://www.stats.govt.nz/news/annual-inflation-reaches-30-year-high-of-6-9-percent/

"Domestic, or non-tradable inflation, was 6.0 percent in the year to the March 2022 quarter, the highest since the series began in June 2000."

You said the reserve bank had one job and one lever. Neither statement is correct. They have lots of jobs and a number of levers which they do and have to maintain stability. The dual mandate is just one of their jobs.

What you didn't mention in your quote above is that tradeable inflation for the same period is 8.5%, the next quarter it was 8.7% and is 8.1% for the September quarter. There is a global inflation problem which directly impacts NZ regardless of what the reserve bank does.

It's a complex topic and it can't be isolated to one factor, it's a whole pile of factors driving this. The current inflation problem is unusual as it's heavily influenced by supply side inflation from the effects of the pandemic and energy constraints from Russia. It isn't a "normal" inflation problem.

johno1234

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#3001015 24-Nov-2022 19:05

I'm sorry you read everything so literally.

The RBNZ had a single mandate and now they have dual mandate. Their new mandate has materially made life worse for New Zealanders. Their tool for mandate 1 is the OCR. All else is very minor in effect.

Orr is now apologising for damaging the economy. "Orr admitted households were paying the price because monetary policy was too stimulatory for too long.". And it was stimulatory because of the new mandate and the loss of focus on the original mandate.

They attempted to fix a system that was not broken.

https://www.rnz.co.nz/news/business/479411/ocr-hike-adrian-orr-apologises-for-significant-economic-shocks-accepts-rbnz-engineering-recession

Handle9

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#3001016 24-Nov-2022 19:14

You are mistaking correlation with causation. There would be an inflation problem with the single mandate or dual mandate.

There is no single cause of this. There are lots of contributing factors which all add up, not just reserve bank settings.

johno1234

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#3001017 24-Nov-2022 19:19

I agree. It just didn't need to be as bad is it is now. We as amateurs have the benefit of hindsight but I expect a lot better from the governor and the political policy he operates under.

GV27

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#3001033 24-Nov-2022 20:27

Handle9:

What you didn't mention in your quote above is that tradeable inflation for the same period is 8.5%, the next quarter it was 8.7% and is 8.1% for the September quarter. There is a global inflation problem which directly impacts NZ regardless of what the reserve bank does.

It's a complex topic and it can't be isolated to one factor, it's a whole pile of factors driving this. The current inflation problem is unusual as it's heavily influenced by supply side inflation from the effects of the pandemic and energy constraints from Russia. It isn't a "normal" inflation problem.

Just like you say there is a global inflation problem, the reality of that is also not simple. If they had not spent so long deferring the tightening cycle and buying into the 'transitory' lie being spruiked by the Federal Reserve, then they could have mitigated the impact of USD strengthening by hiking the OCR quicker than they did, and giving the NZD a higher bottom to bounce off.

Inflation was getting a head of steam well before Russia, despite what RBNZ keeps telling Select Committees. Commentators have called them out on this as being essentially a falsehood. The reality is RBNZ did not tighten fast enough. They admit and accept that. This has made imported inflation worse than it needs to be. It also means we have to now tighten higher for longer. That's bad.

NZ is tiny. The world is big. We are always going to be subjected to external forces and pressure. But that's not a reason to just give up on expecting rational monetary policy at a domestic level. If anything, it makes getting your monetary policy response even more important.

Handle9

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#3001047 24-Nov-2022 20:55

In a perfect world we could avoid this, sure.

The reality of pretty much all central banks policy is they overheat and then over suppress the economies they are trying to keep stable.

Brash was brutal and stunted the economy through the 1990s, Bollard was the same during the GFC and now Orr has overcooked this time.

There aren’t really too many examples of other economies getting it right consistently. I read recently what seems to happen in a crisis is central banks react the way textbooks say they should have in the last crisis instead of adapting to what is in front of them. That seems about right to me.

Still it could be worse, Erdogan could be in charge, firing reserve bank governors who don’t accept his alternate reality and running 85% inflation with a worthless currency.

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GV27

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#3001076 25-Nov-2022 06:26

Handle9: In a perfect world we could avoid this, sure.

This isn't a 'perfect world' thing, it's why they exist. There are serious questions about why RBNZ chose to what it did, and why it persisted with it even after house prices start exploding and prices were taking off.

But don't take my word for it:

https://www.rnz.co.nz/national/programmes/thepanel/audio/2018868273/the-panel-with-leonie-freeman-and-david-slack-part-1

There is a real political appetite to paint these sorts of comments as 'hindsight' but the reality is many, many people were asking why we were letting inflation run over the 3% mark without more meaningful intervention at the time. Commentators, academics, former RBNZ senior staffers etc.

If we do get some good out of this, hopefully it will be a move away from quarterly reporting and towards monthly data gathering; waiting until February to find out how Oct-Dec was doesn't cut it any more.

GV27

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#3001077 25-Nov-2022 06:28

Further:

Instead we just get lots of spin, and lightweight analysis. One of Orr’s favourite lines (repeated as I type at FEC this morning) is that the Reserve Bank was one of the very first central banks to tighten “by some considerable margin”, when in fact there were half a dozen OECD central banks that moved before our central bank did. We had claims from Orr a while ago that the macro benefits of the LSAP programme were “multiples” of those mark to market losses to taxpayers – a claim that quietly disappeared when they actually published their review of monetary policy. A few weeks ago Orr was telling Parliament that if it weren’t for the Ukraine war inflation would have been in the target range – notwithstanding the hard data showing core inflation was already very high well before the war – and then nothing more is heard of that claim when the MPS itself was published.

https://croakingcassandra.com/2022/11/24/no-contrition-not-much-sense-of-responsibility-and-very-little-persuasive-analysis/

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#3001078 25-Nov-2022 06:39

Household savings rate in NZ has always been amazingly low. Governments have talked about it for half a century. At this point it's just accepted as an unusual feature of our economy.

https://www.gfmag.com/global-data/economic-data/916lqg-household-saving-rates

gzt

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#3001080 25-Nov-2022 06:58

The reserve bank governor is sending a very clear message that households should reduce spending for a period. Employment is excellent therefore unlike other economic bumps, fear of unemployment is not going to suddenly slow spending and raise saving.

Orr called for consumers to restrain high spending over the holiday period in the same message. The headline should really be along the lines of Orr calls for consumer spending restraint in the Xmas period. Personally I think those kinds of positive restraint messages would be more effective for consumers.

Handle9

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#3001081 25-Nov-2022 07:08

GV27:
Handle9: In a perfect world we could avoid this, sure.

This isn't a 'perfect world' thing, it's why they exist. There are serious questions about why RBNZ chose to what it did, and why it persisted with it even after house prices start exploding and prices were taking off.

It is a perfect world thing because no central bank anywhere ever gets this right. If there was an example of a central bank consistently getting monetary policy correct then it’d be interesting to see how they do it.

tdgeek

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#3001082 25-Nov-2022 07:14

tweake:

yes its a good thing.

there is a saying "fly into the crash" meaning be in control and crash on your terms. uncontrolled crashes are even worse. the same applies for economics, if you are going to crash at least control how you crash.

the immigration thing, is an idiots fix. if you pour in immigrates then housing market will boom again and that will then crash and take out the economy with it.

unfortunately a lot of the current issues go back to the housing marke,. kiwis addiction to making money from housing has put us between a rock and a hard place.

yep. Covid caused most of the current issues due to the support that all countries had to provide from thin air. Supply issues from lockdowns and restrictions, then when these ease and disappear we still have labour supply issues due to Covid sick days, all these supply issues add to inflation. Over time supply will catch up. If there is a goal to reduce spending, that will help. The war, that spiked fuel prices and everything we buy and do has a fuel component, up go prices. That will also ease in time. Many perfect storms, after each other and overlapping

End of the day NZ is well placed

GV27

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#3001083 25-Nov-2022 07:21

gzt: The reserve bank governor is sending a very clear message that households should reduce spending for a period. Employment is excellent therefore unlike other economic bumps, fear of unemployment is not going to suddenly slow spending and raise saving.

Orr called for consumers to restrain high spending over the holiday period in the same message. The headline should really be along the lines of Orr calls for consumer spending restraint in the Xmas period. Personally I think those kinds of positive restraint messages would be more effective for consumers.

We have food inflation running at 10%. For many, the 'extra spending' is just going towards covering what they used to be able to buy for much much less.

There are big big numbers of people living paycheque to paycheque, and a lot of belt-tightening will have been done already as everything started to spike over a year ago. For those people, spending less means moving closer to or under the poverty line.

As for savings - you generally have to have something left over to save.

GV27

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#3001084 25-Nov-2022 07:23

Handle9:

It is a perfect world thing because no central bank anywhere ever gets this right. If there was an example of a central bank consistently getting monetary policy correct then it’d be interesting to see how they do it.

Again, the fact that other places make mistakes is not a good enough reason to overlook the ways in which we made life harder for ourselves than it needs to be. This is the Covid response logic all over again - "It could be worse so let's just pat ourselves on the back for not being the UK/USA, instead of meaningfully critiquing our response". Guess what happened? We kept getting the same things wrong over and over again.

Things never change or improve if you're going to wave away mistakes, even economy-wrecking ones as "Oh well, at least I'm not that other guy!".

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