The Reserve Bank is Having Us On

Stop smiling, you’re being screwed.

 

 

Some quick observations to set the scene:

• My favourite muesli now costs $5 per bag.  Last year it cost $4.40.  In 2013 it cost $4.  The cost of all staples; bread, milk, butter, have risen similarly.
• On 1 July every year I reset the household budget for the coming financial year.  Almost every line-item went up:  Power, Groceries, Water, Internet, Insurance.  The annualized figure went up by more than 5% in all cases.
• House price inflation, as everybody knows, is stellar.  Especially in Auckland, but around the rest of the country as well this year.
• In 2017, because of storms and flooding, the price of fruit and vegetables has also risen to previously unseen levels.  A lot of our vegetables this year have been imported from Australia.
• The Governor of the Reserve Bank says that CPI inflation was 1.7% in the year to June, and believes that it will settle at around 0.7% for the rest of the year.  As a result he set the Official Cash Rate (OCR) at 1.75% and foresees that it will stay that way for at least a couple more years.  This rate is the ‘Neutral’ setting that will neither stimulate nor constrain the economy.  His plan seems to be to stay well out of it.

So exactly how is Statistics NZ calculating consumer price inflation?  One expert is quoted as saying that, as the New Zealand Dollar has appreciated, the cost of imported goods has reduced.  I don’t get it.  What imported goods?  Petrol?  Anyway, against the Aussie, (our major trading partner) the kiwi dollar has declined.  What, what what?  These guys are having us on!

A quick survey of current macro-economic thinking globally would show that the larger economies are coming out of the doldrums.  The fed has stopped Quantitative Easing, interest rates are rising, ‘hot’ money is returning to Treasury Bonds.

Almost every economist has noticed the limits of loose monetary policy, as federal rates hit zero and there is no concomitant uptick in growth.  The received wisdom then seems to be for the government to start building things, using its fiscal policy to stimulate jobs growth and improve basic infrastructure.  Or else a ‘helicopter drop’ of free money in terms of tax cuts for all.  The National party has prefigured this approach for next year’s budget.

The Australian Governor recently identified wage-growth stagnation as an issue for the expansion of the Australian economy.  He urged Australian workers to rise up and demand higher wages.  When did you last hear a central banker say something that socialist?  Of course Australian wages are already much higher than equivalent New Zealand wages.

RBNZ Governor Graeme Wheeler was recently wittering on about the high New Zealand dollar and the damping effect it is having on our exports.  Now, he is actually not supposed to concern himself with the exchange rate.  According to the Reserve Bank Act of 1989 the only concern the bank is supposed to have is inflation.  It has been proven quite conclusively recently that a country can cut its OCR to zero and have absolutely no effect on the exchange rate at all.  It seems inconceivable to me that he doesn’t know that.  Or perhaps he thinks that we don’t know it?

I would suggest to you that Graeme Wheeler has abrogated his responsibility to the country’s lenders.  By nailing the OCR to the floor in an election year he hopes to stay right away from any criticism and to annoy as few voters as possible.  The vast majority of voters in New Zealand would be in debt to a retail bank.  The much-touted independence of the Reserve Bank is seriously in question these days.

1. The hidden price rises that are crunching Australians’ cost of living:  Daily Telegraph, 20 August.
2. Economics 101 Ardern’s priority:  Otago Daily Times, 20 August.
3. Shamubeel Eaqub: Losing independence: Business Day, 20 August.
4. RBNZ Keeps Key Rate at Record Low on Weak Inflation Outlook:  Bloomberg, 10 August.