Are the Reserve Bank people up to the job?



If you hired people to do a job and after six years they are still not hitting targets – worse, they admit they don’t understand what’s going on – would you not review their ongoing employment?

The Reserve Bank is trying to understand why inflation has consistently undershot expectations over the past six years, which it sees as a strategic priority this year, assistant governor John McDermott says.

In a speech on Wednesday explaining how the central bank arrives at policy decisions, Mr McDermott told the Manawatu Chamber of Commerce that the bank’s forecasting team hadn’t predicted the persistent weakness in inflation or the persistent strength in the New Zealand dollar.

It wasn’t alone in being baffled by protracted low inflation and had been shifting resources to boost its understanding.

“The persistent period of weaker than expected inflation remains a focus for the bank, and the bank’s research programme is shedding light on the drivers of low inflation,” he said.

“Increasing our understanding of low inflation is a strategic priority.”
The bank is projecting the consumer price index will have risen 0.6 percent in the June quarter when the figures are released next week for an annual pace of 0.6 percent.

The bank’s mandated measure of inflation has tracked below the target 1 to 3 percent band since September 2014 as a strong Kiwi dollar and cheap oil prices keep imported inflation low, while record migration removes pressure on wage increases.

The bank refrained from cutting interest rates last month, waiting instead for the June economic and inflation figures. Governor Graeme Wheeler has been balancing the weak level of inflation against the risk posed to the country’s financial stability by rising house prices.

Mr McDermott outlined how the bank makes its policy decisions, without providing any guidance for next month’s review, saying the greater role of committees “mean the bank now relies less on the single decision maker model” and “allows the consideration of a greater range of viewpoints”.

If we are to be uncharitable in paraphrasing that, it says that the single person or small team who used to get it right isn’t available or doing well, so now the bank is consulting a wide range of sources using a scattergun approach in the hope that one of them may actually have a clue.

One way or another, the Reserve Bank has a job of providing confidence and stability. Now that they have admitted they have no idea what they are doing, what on earth do we do with that knowledge?


– Newshub