BRYCE WILKINSON: The mess the government has made of monetary policy, and the task ahead
Inflation is a problem for the first time in 30 years. Property prices have whiplashed. The Reserve Bank of New Zealand (RBNZ) has cost taxpayers $9 billion, for no clear net benefit.
What underlies this mess? This week the New Zealand Initiative published my report addressing that question.
At the start, I thought that responsibility for these developments lay mainly with the Governor. Along the way, I found that the Minister of Finance had played a more directive role than I had thought.
Concerning the Governor, the smoking gun behind the current breakout in inflation is the failure of the Bank’s experts and models to forecast the rise in inflation. Inflation was unintentional.
A serious effort to improve the Bank’s forecasting models should be a priority, but I have not seen evidence of that.
Indeed, the Bank’s employment priorities have been elsewhere. Whereas staff numbers in the Reserve Bank of Australia (RBA) rose a mere four percent between 2017 and 2022, the rise in the RBNZ was 80 percent. Yet, the number of the RBNZ’s “economics” staff in 2022 was less than in 2013.
The report documents the Governor’s advocacy position on controversial and distracting political issues such as climate change and ethnicity.
Another concern is how underpowered the RBNZ is at the top levels and on the critical Monetary Policy Committee, compared, for example, to the RBA.
However, documents released under the OIA show that the Minister of Finance had instructed the Bank to hire based on gender, with no mention of merit. He has also reaffirmed the bizarre policy of not appointing external monetary policy researchers to the key Monetary Policy Committee. And he had taxpayers underwrite the gamble that lost $9 billion.
The government further undermined the focus of monetary policy by introducing contending considerations—maximum sustainable employment and “more sustainable” house prices.
The Minister has also blithely required the RBNZ to use monetary policy to “promote the prosperity and wellbeing of New Zealanders … “. Such open-ended instructions invite presumption and distraction.
The only thing monetary policy can reliably control is medium-term inflation. That needs a tight focus.
The bottom line is that the next Minister of Finance faces a big task to turn things around.
Bryce Wilkinson is a Senior Fellow at The New Zealand Initiative. His report, “Made by Government: New Zealand’s Monetary Mess”, can be accessed here