16 Mar 2023

'Worse than unsatisfactory': RBNZ and Govt criticised over inflation, housing boom

10:07 am on 16 March 2023
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The New Zealand Initiative report has renewed criticism of the RBNZ's handling of monetary policy. Photo: RNZ / Samuel Rillstone

The Reserve Bank and the Minister of Finance have been attacked over monetary policy and inflation by the free market think tank, the New Zealand Initiative.

In a report, Made by Government: New Zealand's Monetary Policy Mess, senior research fellow Bryce Wilkinson has renewed criticism of the RBNZ's handling of monetary policy before and during the pandemic, which left interest rates too low for too long resulting in inflation getting out of control, and stimulating the economy triggering the housing boom.

The paper said the RBNZ and many other central banks around the world were too confident about their policy frameworks, their economic models, did not pay close enough attention to keeping inflation in check, and then acted too late to correct their mistakes.

It also said the RBNZ was distracted by its other mandate - maximising employment - along with a clutch of secondary issues such as climate change.

"New Zealand's recent monetary policy outcomes are worse than unsatisfactory," Wilkinson wrote.

"They include whiplashing house price volatility, consumer price inflation far above the RBNZ's 1-3 percent target range, and a $9 billion loss on the Reserve Bank's large-scale asset purchase programme (bond buying)."

Man sits infrom of bookshelves

Senior research fellow Bryce Wilkinson says the RBNZ's monetary policy left interest rates too low for too long, resulting a inflation getting out of control, triggering the housing boom. Photo: RNZ / Kate Gudsell

He also took the RBNZ to task for poor economic forecasting, such as repeatedly being wide of the mark on inflation, which is part because of a depleted forecasting unit.

"That forecasting failure is a central concern."

The report echoed many of the criticisms of central banks, and the surge in inflation contained in a report authored by Wilkinson and former RBNZ Governor Graeme Wheeler in July last year.

In a background paper in August, Reserve Bank said pandemic monetary policies worked despite overly stimulating economy. The RBNZ said the programmes were an effective response to the global economic shock which threatened "very bleak downside scenarios".

the central bank published a review of the previous five years of monetary policy, which found inflation should have been countered earlier, but monetary policy decisions were consistent with data and information available at the time.

Finance Minister Grant Robertson said the report indicated the bank got the big decisions right. "Every central bank in the world was faced with these decisions all at the same time."

Lacks credibility, expertise

Wilkinson said the RBNZ's senior executive levels and the board also lacked knowledge and experience in key areas such as monetary policy, macro-economics, and financial market regulation.

"The Reserve Bank's Board, its governors and its MPC (monetary policy committee) seriously lack relevant expertise."

"The Bank has lost much technical expertise in monetary policy and institutional knowledge because of high turnover and its employment focus."

Wilkinson squarely pointed the finger at Robertson for the performance of the Governor, the Board, and its loss of focus.

Finance Minister Grant Robertson released the half year economic and fiscal update (HYEFU) on Wednesday 14 December 2022.

Finance Minister Grant Robertson Photo: RNZ / Samuel Rillstone

"The Minister of Finance bears the heaviest responsibility for monetary policy decisions."

"He determines its objectives and appoints the Governor. He plays a decisive role in making appointments to the Reserve Bank Board, and also influences MPC appointments."

Wilkinson said Robertson had also loaded the RBNZ with extraneous duties and remits in areas that had no relevance to monetary policy and which could not be affected by it.

He said as a result the RBNZ had lost credibility as an inflation targeting institution, and had become partly politicised through the way it was being managed by the Minister.

It made little difference that the RBNZ was in the same camp and had made the same mistakes as other central banks around the world.

"The outcomes for New Zealanders count, and the inflation and fiscal cost outcomes were poor."

Wilkinson said the real message of the report was aimed at the next government.

"They need to pay serious attention to what changes they might make to reposition the Bank. As a boat, it is off course and far from watertight."

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