ANZ Banking Group chief economist Richard Yetsenga says questions should be asked as to whether central banks' inflation targets remain relevant

ANZ Banking Group chief economist Richard Yetsenga says questions should be asked as to whether central banks' inflation targets remain relevant

His team may be tipping cash rates of just 0.25% on both sides of the Tasman, but ANZ chief economist Richard Yetsenga doesn't expect such low rates would prove a silver bullet and says questions should be asked as to whether central banks' inflation targets remain relevant.

Speaking to interest.co.nz in a Double Shot interview, Yetsenga said ANZ is picking three cuts from both the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) by next May taking both their respective cash rates to 0.25%. Why? Because the current 1% record low both central banks are at isn't working.  

"Both central banks are undershooting their inflation targets. Growth has been slowing in both economies," Yetsenga said.

"In New Zealand the business surveys are suggesting we'll probably get some further slowdown in growth. In Australia growth might be basing out, the housing market looks a little bit better, but New Zealand's coming off a 2.5% growth rate, Australia's potentially stabilising at a 1.5% to 2% growth rate. [It's] difficult to see how either central bank's going to achieve their inflation target under those conditions given interest rates where they are, even though they're so low from a historical perspective."

But asked whether he thinks rates at 0.25% will be a silver bullet, Yetsenga says; "Probably not, no."

"It's very difficult for me to argue that you will get inflation in either Australia or New Zealand sustainably at 2.5% based on what either central bank does with monetary policy."

"It doesn't mean you shouldn't do anything because their mandates are to achieve an inflation target. They need to deliver into those as best as they can. But the reality is we've got a global environment that's not generating much inflation. We've got weak business investment and we've got low wage growth. And they're the things that ultimately are going to get inflation back to the target, if and when they happen to return," said Yetsenga.

The operational objectives of the RBNZ's monetary policy are to keep future annual inflation between 1% and 3% over the medium term with a focus on the 2% mid-point, and to support maximum sustainable employment. In determining monetary policy, the RBA has a duty to contribute to the stability of Australia's currency, full employment, and the economic prosperity and welfare of the Australian people. It has an inflation target, seeking to keep consumer price inflation to 2% to 3% on average over the medium term.

The latest official inflation figure for New Zealand was 1.7%, and for Australia it was 1.6%.

Are the inflation targets still relevant?

Asked whether we should be questioning whether these central bank mandates and targets are relevant, Yetsenga said yes, we should.

"The Reserve Bank of New Zealand, New Zealand, led the way on inflation targeting. It chose a particular form of inflation target...Never in the last 25 years has there ever really been any question about the central bank's ability to achieve its target. The only question was 'what level would you choose, was it hard edged or soft edged,' other administrative issues, But there was no question about achieving the target."

"Now, of course, even with quantitative easing in some economies, interest rates below zero, interest rates in New Zealand at 1%, which even five years ago you would've thought would never happen, we still can't achieve the inflation target," Yetsenga said.

"Yeah, I think we need to have a look at what the targets are, how they intersect with structural issues in the economy, what their successes and failures have been, and a long hard think about whether we've got the right framework."

But asked whether he has any alternative framework in mind he said he didn't.

"The only thing I can think about at the moment is easing a lot when it's not doing a lot might not seem like the right thing. [But] when you have an economy with a reasonable amount of debt the last thing you want is inflation expectations to get un-anchored to the downside. The last thing you want is to get entrenched deflationary expectations, that would be a much worse situation, I think. So what central banks are doing to me is entirely appropriate," Yetsenga said. 

"But probably I'd prefer maybe a 'do no harm' approach to policy. If growth is okay and there's no further deterioration in inflation, even though you're undershooting, why wouldn't you just be patient and be happy with that and see how things transpire. But that's not the way we run policy. We have an active target, we need to do what we can to get it."

'Talking about stimulus is unhelpful'

Asked whether he thinks the New Zealand Government should be taking advantage of its strong credit rating, low debt level and low global interest rates to borrow and provide some economic stimulus through infrastructure investment, Yetsenga wasn't especially enthusiastic.

"There's a famous quote out of the US. If interest rates were at zero we should bulldoze the Rocky Mountains. So I think it's attractive to think about low bond yields and say 'well the government should borrow and spend some money.' Particularly when you are growing your economy [and] one of the primary means you're generating growth is by importing people, which a lot of small open economies are doing. You need infrastructure for quality of life reasons, to move people around and hospitals and school capacity and all those things. So you need that. Is it going to sustainably drive growth, the answer is no it's not." 

"You can ratchet up infrastructure a little bit, but you spend some time in the centre of Auckland [and] it's pretty disruptive when you need to do large scale infrastructure, it's environmentally unfriendly, it's extremely expensive. And if you want to drive growth in the economy you need to do more infrastructure on top of the more infrastructure every year," said Yetsenga.

"I think talking about stimulus in a way is unhelpful, not that it's not important, because it takes us away from the fact that there are some big issues here. And chasing growth for the next year or the next two years, sure we'll ideally have a bit of that, but actually it's the structural picture which needs the work."

So what happens if the RBA and RBNZ do both cut to 0.25%?

"There's a new acronym we're using, ELB - the effective lower bound. I think the experience of Europe is you can still have some easing impact taking interest rates below zero. But a 25 [basis] point cut below zero is much less effective than a 25 [basis] point cut when you're in positive territory. And one of the key reasons is because you impair the ability of the banking system to deliver credit."

"So we're hopeful that central banks in Australia and New Zealand choose other mechanisms if further easing is needed at those low yields rather than taking rates into negative territory."

He said some form of quantitative easing, or QE, was most likely.

"I think it will be something in the QE realm and one of the by-products will be to hopefully get the exchange rate down and keep it down."

Will technology be the circuit breaker, eventually?

So is there a circuit breaker out there?

"At some point the technology disruption we're going through, which for virtually every occupation, every industry, every company, they're being disintermediated or adjusted in some way because of technology. Ultimately we should come out of that with higher average living standards, more income growth, better paying jobs. But we're in the disruptive phase," Yetsenga said.

"Now if you look at the industrial revolution there's evidence that the disruptive phase lasted for 50 years. I have no view on how long or short this disruptive phase right now will be relative to that, but it could go on for quite a period of time." 

"That's about the only really positive circuit breaker I see at this point. That we do get the productivity wave coming out of technology and that drags living standards higher the way every other productivity wave has done," said Yetsenga. 

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15
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.. it isn't so much about stimulating growth that's in central bwankers minds ... it's about quietly inflating away the monstrous debts racked up in bailing the banks out of the GFC , and the aftermath of anemic growth. . 1 % inflation ain't quick enough , 2 or even 3 does the trick . .

Yóu're on the money.

The banksters are they're trying everything in the book to deflect attention away from their get rich quite scheme. Distraction!!!

ANZ's Richard Yetsenga is just another puppet they're rolled out, to draw attention away from the Hisco saga. And wasnt that a get rich quick scheme.

They know the pitch forks are coming, as their ponzi scheme comes closer to unravelling. Let nature order another hurricane Dorian to their island retreats in between times.

12
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Crikey, the slowly dawning realisation that the NZ Inc Dept of Fashionable Ideas might not be all it's cracked up to be? Exciting, a bit like watching paint drying, but, at last, a willingness to question the orthodoxy. Gentle reform is way overdue. We still have the chance to delicately adjust the tiller before the next gust hits and knocks the boat flat.

Personally, I think he is bang on with identifying excess immigration as a major problem maker. When people were fleeing NZ for work in Ausssie it was probably a good idea. (Remember that?) The 2% inflation target was also a great idea, when inflation was 8% or more, but long term my guess is that 0% is fine.

What else? Excessive reliance on bank funded debt serfdom comes to mind. Decent affordable houses at 2 or 3 times earnings should be easily achievable. They used to be. That way people can actually buy a house, not just service a mortgage. My guess is that excessive foreign capital inflows is to blame here.

Both political parties, and the fashionable idea believers of the bureaucrat class, have forced their deluded obsessions about more immigration and more foreign capital being always wonderful upon a sceptical populace. These policies are useful at times, and dangerous at others.

Reddell exposes some of the fallacies about immigration and the societal chaos it causes if the rate is too high. Pettis explains in detail how foreign capital inflows into an advanced economy cause either more debt or more unemployment. (Though a bank economist cannot believe that without real career risk, now can he?)

It's going to be hard to get growth in our economy when the government is actively trying to squash its main contributor.

What is its main contributor in your eyes?

10
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... workers ... regular folks... taxpayers ... people who drive cars to work and dont get WFF or other middleclass welfare c*ap ...

They're the main contributors to our economy , and the ones being squashed by Taxcinda & Julie-Anne ..

... workers ... regular folks... taxpayers ... people who drive cars to work and dont get WFF or other middleclass welfare c*ap ...

I thknk you will find most people in NZ are directly or indirectly receiving some form of social welfare, whether you're in a low income bracket or even a 1%er.

In essence what you're saying is that the main contributors to the NZ economy are expats who keep cash deposits in NZ that can be leveraged for housing loans. That is the most important and critical sector of the NZ economy.

... no , that most certainly is not what I'm saying ... what I'm saying is what I said ...

... no , that most certainly is not what I'm saying ... what I'm saying is what I said .

So you're saying that there is a swath of NZers who are not benefitting in any way by the welfare state? I think you're wrong.

J.C. - Gummybear is quite right. Hubby and I bring in less than $90,000 combined....we have no kids, we get zero handouts from the govt (direct or indirect)....we're getting royally screwed by whomever is in power in Wellington. We are heartily sick of paying for everyone to breed. We're sick of being told that we're the ones that have to have increased taxes and costs just so people can have a handout and feel good wellbeing sh*t. We're done being told to suck it up with the expectation that we have to look after everyone else. We now operate to look after ourselves and all charity has stopped as a result. We've simply had enough.

Spot on , Kirsty ... successive governments have introduced layers of "packages " to bribe voters ... WFF , interest free student loans , accommodation supplements , first tertiary year fee free , yadda yadda...

... $ Billlions wasted unnecessarily ... WFF alone , if scrapped , would enable the government to give massive income tax cuts to all workers ... plus , it'd save a small fortune in reducing the bloated bureaucracy who oversee all this rubbish...

Spot on , Kirsty ... successive governments have introduced layers of "packages " to bribe voters ... WFF , interest free student loans , accommodation supplements , first tertiary year fee free , yadda yadda..

Right. Just because you don't receive all this largesse, it doesn't mean you don't indirectly benefit from it. And your point about trade offs (WFF cf lower income taxes) is understood as it pertains to your own personal situation. However, suggesting that you don't indirectly benefit from this is wrong. If you were living a survivalist existence in a remote part of the country, then it's a little different. High liklihood that you're not.

To be fair a lot of those have existed in some form or another for a long time. My grandmother got “family assistance” when my mum was born, tertiary education used to be completely free, and a large percentage of the country used to live in a state house. So you probably have benefited from government assistance at some stage - maybe time to pay it back a bit.

Indeed. And they still expect to be looked after well in their old age, too.

That said, the accommodation supplement and Working for Families need to go, really. Communism by stealth, John Key called it...then did nothing, basically his modus operandi. They don't help, merely subsidise company wage bills and property investors.

The biggest problem is we don't incentivise people to invest in business because we make it far more attractive just to rely on easy and untaxed money from property speculation. All one needs to do is pretend one is not buying for capital gains in order to evade tax.

Solo Mum of 2 getting $750 a week and struggling. This is the equivalent of $22.50 an hour for 40 hours a week after tax. The average pay for an Early Childhood Teacher is $23 an hour.

https://www.rnz.co.nz/national/programmes/insight/audio/2018711947/solo-...

Josephine is raising two kids on sole parent support - what used to be known as the domestic purposes benefit or DPB - and says money is tight. She gets $750 per week for her and two children including an accommodation allowance. “I just didn't go to the supermarket for those three weeks. I'm lucky in that I have my mum's garden, so we have leafy greens, and we just ate all our stocks."

"According to the latest figures from the Ministry of Social Development, there are just over 59,000 people on sole parent support and the vast majority of them are women. Between them, they're raising more than 116,000 children."

Average of 1.96 Kids.. so for every single parent with one kid, there is one with 3.. Would be interesting to know how many got on the DPB with one, and expanded the brood to 3+ while still on the DPB.

A lot of beneficiaries have taken out car loans and other hp which then eats a big chunk of their incomes. They dont have the expenses that an EC teacher would have such as travel to and from work and work clothing costs either.

JC is again trying to work the angle that expats with deposits are more valuable to the economy than those who live and spend here

Well, that describes me. Lol. But i've noticed everyone seems to think its them who is getting screwed by govt. Farmers, Landlords, The poor , the middle class, the top earners. Everybody plays the victim card.

Since the majority of the taxes are paid by the wealthiest who are invited in the financial and economic wellbeing of the country, not sure what makes you think that you as a “regular folk” and those like you are the ones driving the country’s economy. Were you not educated in New Zealand, do you not have children in school, do you not use the health care system, o you not live in a relatively safe country that you think you are not benefiting from the largest of this country? Surprise, you too benefit from the welfare state.

thanks for the economic update Richard,

could you also enlighten us as to what it means to our economy when Foreign Owned banks make $5 billion profit per annum, more than the entire countries trade Surplus ?

just in lay mans terms please so us non economists have a chance of understanding your ideas.

much appreciated

... Australian bwanks are milking us , their customers and mortgage holders , far more profitably than Fonterrible's suppliers are milking their cows ....

Moooo !

People farming is so much easier on the nose than dairy farming, too. No shovelling shit or getting up at unsociable hours either. We need both, but the balance got lost somewhere. Anyone know where it went?

Then why bank with them? Example ANZ no sane Kiwi should do business with them? Yet we do and moan moan...

.. far from moaning . . I am in awe of the Aussies who extract more profit from our economy , with negligible carbon footprint , and zero effluent in our waterways ... than our entire dirty dodgey dairy industry ...

They're a model we ought to emulate . . Bloody brilliant !

You moan and moan, I stopped moaning when I ditched kiwibank. Quite happy with all three of the Aussie banks I use thanks.

.. yup ... whatever people think of the BNZ & ANZ , in my local branches they are cheerful and courteous ... several degrees of warmth and friendliness above the local Kiwi Bank ...

We are so far past interest rates!

Exactly:

But what else can a guy like Mario Draghi do? Europe has never left the zero lower bound, the floor of its money corridor has remained sunk underneath it for the last half decade. This already proposes failure on the part of QE and everything else that has come with it. If you can’t ever get off zero, none of this stuff works.

It doesn’t keep them from trying, though. Right around the corner, any day now, they’re bound to discover that magic number, the mythical right combination of ingredients and factors that will, just in time, save the day.

In the end, QE has become the same joke as socialism. The proponents of the latter are fond of dismissing its massive and deadly failures as not being “real” socialism. Real socialism, they claim, has never actually been tried.

That’s what Mario Draghi is attempting to say now. He is hard at work struggling to rescue his own legacy and reputation by discovering the “real” QE. The zero lower bound will not slow this guy down. He’s already done NIRP (before QE, actually) and there’s more that can be done. His toolkit, Draghi will tell you, is far from empty.

Which is already an odd proposition. NIRP was supposed to enhance QE; the latter created bank reserves or what people still call “base money” (it isn’t) and the former forced banks to use them. The entire point of the negative interest rate imposed upon the banking system was to harm banks just enough so that they have little other choice but to lend and buy risky securities in order to make back their profits. Link

“even with QE in some economies, interest rates below zero, interest rates in NZ at 1%, which even 5 years ago you would've thought would never happen, we still can't achieve the inflation target” After so many decades, especially looking at Japan’s situation, economists seem to be realising that lowering interest rates and massive QE are not producing the desired inflation, yet we are still going to do the same as Japan anyway? When will the major rethink happen?

It's the bank centered system reacting on it's own.

Doubtful a thoughtful rethink to happen.
More an orchestrated "horns of dilemma" situation constructed for political approval/capitulation. To get to next level, pass the next miss.

Bank centered system.
Lucky to have we have the executive in Wellington. We do.

German’s Bundesbank slams ECB for huge stimulus package

It's not a stimulus package but continuation of the longstanding ECB plan to annihilate German economic growth & prosperity by destroying the 1500 not-for-profit community banks that have been funding the Mittelstand SMEs at the heart of German economic performance last 200 years

One chicken dinner for you

These charlatans keep spinning yarns for the weak minded and gullible while continuing to decimate (more dangerous than standing armies) our society.

Yeah ! .... .... pardon ?

I SAID... ah fudeggaboutit

. . Oh , of course , yes : Agreed .. you , good sir , are a skilled wordsmith ....

I just thought " f*ck them ! " ....

been doing it for years, they have

https://youtu.be/LqAGeM-Lt2g

. . Wow .. Godfrey doesn't sugar coat it , does he ... blooming brilliant speech !

Yep!

It's all about the exchange rate!

As central banks ease around the globe we have no choice but to ease too to keep our exchange rate low and save the likes of Fonterra from more harm.

This is all quite bizarre. Why does the RB believe that if they just keep on lowering the OCR, businesses will suddenly start borrowing to invest when they are by and large not doing so now? Why does anyone believe that we will become wealthy by maintaining immigration at an unsustainable level?
NZ has had a poor productivity record for decades and until we fix that, we will just keep bumbling along.