Finance Minister Joyce says not getting involved in Reserve Bank Governor Wheeler's complaints about BNZ economist's criticism of Reserve Bank's monetary policy stance

Finance Minister Joyce says not getting involved in Reserve Bank Governor Wheeler's complaints about BNZ economist's criticism of Reserve Bank's monetary policy stance

Finance Minister Steven Joyce says he’s not getting involved in the furore surrounding Reserve Bank Governor Graeme Wheeler and BNZ’s head of research Stephen Toplis.

Speaking to media Thursday, perhaps ironically at an event at the Reserve Bank museum, Joyce said he just was “not going to go into that,” He said doing so would be an “unproductive use of my time.”

“That’s a matter for the Reserve Bank Governor, as to how he conducts his communications with the banks and their economists,” Joyce said. He had not reached out to the Bank’s board on the matter.

A Reserve Bank spokesperson on Thursday told the Bank had “nothing to add” on the situation.

BusinessDesk earlier this week reported on an exchange of letters between Wheeler and BNZ CEO Anthony Healy in May, in which Wheeler raised concerns about commentary written by Toplis on the Reserve Bank’s monetary policy stance.

The exchange has led to questions of whether the move was a case of the Reserve Bank over-reacting to market commentary. Read former Reserve Bank economist Michael Reddell’s take on the situation here.

Toplis has criticised several monetary policy decisions and speeches given by Wheeler over the past few years. Read David Hargreaves article covering some of the controversy published in February. You can read the full set of comments written by the BNZ’s Toplis on 8 May further below.

The letters

On 11 May, Wheeler wrote to Healy “to draw your attention to the language used in the BNZ Markets Outlook of 8 May 2017, which appeared to bring into question the integrity of the Reserve Bank.”

Wheeler continued:

“The document claims that the Bank would be negligent if it didn’t conform to the views of the BNZ economists. Negligence is a serious accusation and implies that the Reserve Bank would not exercise reasonable care in the discharge of its responsibilities. The document also makes other claims that the Reserve Bank would not implement monetary policy in the best interests of New Zealanders. For example, that we would not adjust our policy stance, even if our analysis indicated that appropriate, if it in some way embarrassed the Reserve Bank.”

Bringing into the question the bank’s integrity while fundamentally misrepresenting how the Reserve Bank formulated policy was unacceptable, Wheeler wrote.

“The Reserve Bank makes a considerable effort to explain its monetary policy processes, engage with market participants, and communicate clearly its monetary policy stance. Given these efforts, I would have expected BNZ economists to be more accurate and careful in their choice of words. I would also expect that the editorial quality assurance process (and any legal sign-off involved) would have identified that an accusation of negligence is inappropriate in a public document distributed by the BNZ.

“I should stress that we respect the forecasts made by market analysts and pay close attention to their views in our monetary policy process. We do not always expect to agree on outlooks or policy responses, but instead seek that differences of view are reasoned and understood.”

In the letter, Wheeler outlined that a number of the Reserve Bank’s Governors team had met separately with a BNZ representative to convey concern at the personal nature of criticism being expressed by the BNZ in its publications.

“When this failed to address the situation I met with you and passed on examples of the material. I mentioned that the BNZ approach was damaging to the Reserve Bank and the New Zealand financial market, and the personal nature of its tone was contrary to that of other banks.”

Wheeler signed off the letter by referencing serious concerns about the inappropriateness of the language in the 8 May report, “and would ask that you bring it to the attention of those responsible for the editorial quality and any legal sign off.”

Healy replied on 16 May, acknowledging Wheeler’s sentiment and concern. The matter was being treated with the utmost seriousness, he said. Healy said BNZ would be reviewing the contents of the Market Outlook and requested a conversation at the end of the month with Wheeler on this issue.

The commentary

Make up your own minds. The BNZ commentary from 8 May is below:

There is no excuse for the cash rate to be just 1.75% in New Zealand. But odds are the Reserve Bank will find one when it delivers its May 11, Monetary Policy Statement. As we see it: inflation expectations are elevated and rising; growth is at or above trend; capacity constraints are intensifying; headline and core inflation are around the mid-point of the Reserve Bank’s target band; the currency is proving to be weaker than anticipated; and commodity prices are pushing New Zealand’s Terms of Trade to near record levels. All of this argues for the cash rate to be a lot closer to neutral than where it currently is.

So why do we think the RBNZ will sit pat this week? Simply because it said it would. When it released its March OCR review, the Bank reaffirmed that not only did it expect interest rates to stay where they were for the foreseeable future but it went on to reiterate that it thought there was equal chance that the next move could be a cut as a hike. To hike this week would leave the Bank with egg splattered all over its face, a prospect it couldn’t abide.

But surely, at the very least, the Bank will be forced to admit that it now has a tightening bias? Equally, it would be negligent not to express this through an explicit expression of rate increase(s) in its published OCR track. The biggest questions should revolve around how early the Bank is prepared to poke in a first rate increase and how quickly (if at all) rates rise thereafter.

Realistically, we have no idea how the Bank will weight its desire to be consistent (with previous statements) versus the increasing evidence of rising inflation in the data. With no great conviction, we think the Bank will print a track which shows the first rate hike in H2 2018 rising at around 10 basis points a quarter thereafter. And given that the neutral interest rate is likely to be significantly above current levels, even this track would allow the RBNZ to reiterate that “monetary policy will (still) remain accommodative for a considerable period”.

Perhaps the most important development recently has been the surge in CPI inflation expectations. The RBNZ’s two-year-ahead series rose to 2.17% in Q2 from 1.92% in Q1 and 1.68% in Q4, 2016. The six month 0.49% increase was the highest in the thirty year history of the series. The previous drop in inflation expectations was cited as the main reason that the Bank slashed rates when it did. One assumes that the reversal of expectations’ declines should thus mean the same for interest rates. And let it not be forgotten that the last time inflation expectations were at current levels the cash rate was 3.5%.

Of course, one of the main reasons that inflation expectations are rising is because headline inflation has pushed significantly higher. Having been near zero for quite some time, headline inflation has now jumped to 2.2% on an annual basis. The rise to (and through) the mid-point of the RBNZ’s target band has occurred two years earlier than the RBNZ had expected. Sure, there are a few one-offs driving the jump last quarter but we still believe inflation has not yet peaked and that it won’t drop below 2.0% until 2019 (and that only with the help of higher interest rates).

Importantly, not only has headline inflation moved to the middle of the target band but core inflation is there too. Our derived measure, based on the six “core” readings that the RBNZ follows, sits at an annual 1.9%.

Meanwhile, the pressure on future inflation keeps rising. To start with, the NZD Trade Weighted Index (TWI) is currently almost 5.0% below the level the RBNZ assumed it would settle at through the current quarter. Was it to stay here that would add around 0.5% to the RBNZ’s year ahead inflation forecast by itself.

And elsewhere the pressures continue to rise. Capacity utilisation indicators keep going from strength to strength, the unemployment rate (at 4.9%) is now at or below levels previously considered as inflation-generating, dairy prices are rising and will push the terms of trade back towards record highs and it is highly likely that the upcoming Budget will deliver an easier fiscal policy track than that currently built into RBNZ forecasts.

Sure, lending rates are already rising as bank funding costs increase. Credit growth is also being restricted thanks to a combination of the liability growth difficulties faced by banks, tighter RBNZ controls and the increased cost of capital. And, consequently, the housing market does appear to be softening (at least in Auckland and Christchurch).

From the RBNZ’s perspective they will also point to ongoing low wage inflation, further uncertainty in the global economy and the transitory nature of some of the recent price “shocks”. This is fair enough we still believe that the potential deflationary impacts that persist seem to be well and truly overshadowed by the inflationary pulses elsewhere. Moreover, our general premise is that as all else starts to return to “normal” so too should interest rates.

Taking all this into consideration, we not only believe the RBNZ will have to formally move to a tightening bias but we also believe that it will, eventually, be forced into moving rates even earlier than we have previously hypothesised. Accordingly, we are taking this opportunity to move our own projected first tightening from May 2018 to February 2018 even though we doubt the RBNZ will say anything of the sort this time around.

The remaining data for the week will have no bearing on the RBNZ’s near-term thoughts though Friday’s PMI will provide further insight as to the economy’s strength. We have been flabbergasted by the strength in this index. The March reading of 57.8 was the highest since July 2013 and, in combination with the strength in the PSI, the indicator suggests GDP growth will rise to an annual 4.0%. We don’t think production GDP will rise to these heights so even a relatively large drop in the index would remain consistent with our own view of around 2.5 to 3.0% annual GDP growth. That said, expenditure GDP growth is sitting around 4.0% currently and may well be better reflecting the true nature of the current expansion.

Whatever the case, we would expect some moderation in Friday’s PMI level.

On the same day as the MPS we get April’s food price data. Food price increases were a significant driver of headline inflation through the March quarter. We expect a seasonal moderation in their impact through the June quarter but poor weather will boost fresh vege prices such that we expect overall food prices to be up 0.5% for the first month of the quarter. This is consistent with our view that the CPI rises 0.2% through the June quarter yielding an annual increase of 2.0%.

Wednesday sees accommodation data for the month of March which should reaffirm the growing pressure on New Zealand capacity in the tourism sector. On the same day Electronic Card Transactions data are due. We have pencilled in 0.6% for the month but there is the potential for a “rogue” number given that this April had both Easter and Anzac Day, these coincided with the school holidays and then there were activity-impacting storms to boot. So, whatever the number, we won’t pay it too much attention.

The Crown Accounts release for the nine months to March is also due Wednesday. This should provide more evidence that the nation’s fiscal position is getting healthier by the day. It will thus provide the Finance Minister with further ammunition to support his view that Government will be able to reduce debt further while also increasing expenditure on infrastructure needs.

On Tuesday the RBNZ publishes its most recent findings on the stock of credit. This will provide much more detail than previous RBNZ releases and will be watched with interest as a consequence. Unfortunately, however, there will be no time series so it will be some time before we get a better understanding of the evolution of the data.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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GW: "Da say mean fings to me muma S"...
SJ: "Come suckle on my man bobbies little G"...

Two economists, one wicketless one topliss. A dawn duel should be called both are likely to shoot and miss.

Am happy to back RBNZ.

I remember some years ago that Toplis got a firm rebuke from then RBNZ Governor, Dr Alan Bollard.

People have long memories, Mr Toplis.

I expect the bank economist to forecast the moves of RBNZ. There is reasoning as to the banks position so I'm not clear what Wheeler was getting at.

Past history shows that BNZ has called OCR changes completely wrong in the past. When RBNZ telegraphed substantial OCR cuts BNZ were blindsided when every other bank managed to anticipate the obvious change.

I'll also throw in Tony Alexander banging on about smashed avocado, sky tv and buying meth contaminated houses. In both cases BNZ have been out of step with reality.

In this case BNZ will probably be wrong (again) and Wheeler should target the specific item he has a problem with if he doesn't want others to try to decypher what he's meaning. If Wheeler is moaning about the personal nature he needs to realise that once you are a public figure you lose some of the privileges of a private citizen. He needs thicker skin.

Methinks the Governor doth protest too much. Career risk is a real form of special interest, and both parties are subject to it. A civilised society is based on respect for its institutions, but it must be earned not required.

Having said that, the Governor seems to me to be doing a good job, possibly an excellent one, if the reduction in external debt is anything to go by. That really matters. Our weakness is our inability to play what I call Capital Defense, which is basically how to stop the inflow of destructive foreign capital. Destructive foreign capital is capital that pushes up prices of existing assets and thus reduces productivity.

I agree Roger, especially regarding destructive foreign capital. However, I find BNZ the most annoying, loud mouthed bank imaginable so can't find it in myself to disagree with RBNZ on this.

BNZ has one of the highest floating mortgage rates at 5.9%. Though Westpac are now up to 5.95%.
While inflation is 2.2. And the OCR is 1.75.
Perhaps the banks margins are requiring a reason for rate hikes?

It's what a mortgage broker I know was suggesting was going to happen. Parent banks aren't necessarily happy with any slowdown in profits or it has to come from somewhere.

Definition : A failure to behave with the level of care that someone of ordinary prudence would have exercised under the same circumstances. The behavior usually consists of actions, but can also consist of omissions when there is some duty to act

Topliss looks spot on to me. Headline Inflation at 2.2%? Someone is going to have egg on their faces, and if it's the RBNZ, that will have a far bigger impact on all of us than if it is Topliss.

Sounds like someone is taking a leaf out of Trump's thin skinned playbook...