Reserve Bank Governor Graeme Wheeler was both positive and defiant during the final press conference of his five-year term.
Had the Reserve Bank run monetary policy too tight? With hindsight, was the 2014 rate hike episode a mistake that he regretted?
You get the feeling Wheeler would have liked to tell various journalists to just stuff off. But as always, he kept his facial expressions neutral and answered in his very calm matter-of-fact way why he respectfully (well, he didn’t actually use the word), disagreed with what was lobbed at him.
So here’s a quick rebuttal to the two main criticisms of Graeme Wheeler’s five year term in office – in his own words.
Criticism number 1: Tradables inflation was negative for about four-and-a-half years of your term, the longest period since the Great Depression (and headline inflation below 2%). The currency has been consistently higher than the Bank wanted. Did the Bank keep monetary policy too tight?
“I don’t think so,” was the response. New Zealand’s economy over the last five years grew on average at about 3% a year - above trend – while employment growth of 3% a year had also been above trend, Wheeler said.
Yes, low productivity growth was disappointing – zero or negative on some measures – but the RBNZ doesn’t have much control over that; Wheeler later encouraged Parliament’s Finance and Expenditure Select Committee of MPs to focus on how to improve our productivity conundrum.
“You’ve seen output growth and employment growth above trend. It’s hard, I think, to make the argument that that’s an indication of monetary policy being run too tightly,” Wheeler said at the Reserve Bank’s Thursday morning press conference.
And monetary policy affects output and employment growth. (Yes, there are other factors, like population increase and construction backlog, so the RBNZ was one of the driving forces).
This was during a time when the Bank was facing some extremely difficult forecasting tasks. Parts of the economy are just hard to pick – commodity prices, for example.
“We had a 70% decline in oil prices, we had a 75% decline in whole milk powder prices. The ability to forecast those [is] highly difficult, to say the least,” he said.
Given all that – and let’s also give him points for inflation at least being in the lower part of the band rather than the higher part – would Wheeler have taken this situation by the time of his last press conference if it had been offered to him five years ago?
“If you go back for some period [before Wheeler’s term], you’ll find that inflation was at the high end of the band – it was around 2.9%...and that was one of the reasons why we put the emphasis on the 2% midpoint [in the Policy Targets Agreement],” Wheeler said.
“But we also knew that monetary policy is enormously difficult to calibrate – there’s judgements about lags and transmission mechanisms. So that’s why we always refer to ‘over the medium term’ and ‘on average’ and those sorts of concepts.
“If you say, by and large, ‘has the economy performed well in the last five years in terms of output and employment growth, has house price inflation come down from 15% to just over two at this point, and is core inflation running at around 1.5%, and given that you’re going to have volatility in headline inflation because of tradables inflation,’ then I think that’s a pretty good outcome,” he said.
“And the central bank can take some credit in those outcomes. It’s not the whole story – far from it, there’s an awful lot of other things happening. But I think the Reserve Bank has been pretty successful in many respects.”
Those 2014 rate hikes
Criticism number two: How about that 2014 rate hike episode, then. With the benefit of hindsight, did the bank tighten too quickly then?
This is where defiant Wheeler appears.
Rates were raised four times, he reminded us. New Zealand’s terms of trade were at a 40-year high, oil prices were over US$100 a barrel, whole milk powder prices very high, the market was pricing in OCR tightening and the IMF was forecasting a positive output gap (as was the RBNZ).
“I think it was a reasonable judgement on the information that we had available and what the market was pricing and what other commentators were expecting – that we did tighten monetary policy,” Wheeler said.
“The test is, do you make appropriate decisions based on the information you have available at the time? And then if that information changes on you, do you then make appropriate decisions and modify your views?”
What the Bank didn’t anticipate when hiking was that commodity prices might tank – that would have been very hard to do, he said. The front fell off many commodity markets. Oil fell to $28/bbl from $110/bbl, whole milk powder prices crashed from US$5,200/mt to US$1,590/mt. The Bank cut the OCR seven times.
“If you ask those tests, I’m comfortable that the Bank meets those tests.”
And that was that. Thanks for coming.