David Hargreaves says Governor Graeme Wheeler's 'non-speech' this week is not a particularly distinguished way for our central bank to start a New Year that promises, globally, to be very turbulent

David Hargreaves says Governor Graeme Wheeler's 'non-speech' this week is not a particularly distinguished way for our central bank to start a New Year that promises, globally, to be very turbulent

By David Hargreaves

Back in September 2015 I complained strongly about the Reserve Bank's decision to reduce the number of times in a year it reviews official interest rates.

Previously, before the RBNZ made changes, there was a full Monetary Policy Statement in December followed by a rate review issued in just a one-page press release in late January.

Now we get the full MPS announcement in November, followed by another full MPS announcement in February - but there's a three month gap between these announcements. As well as this long gap we also now have fewer (with seven) reviews during the year than most major economies.

I thought when this change was announced in 2015 that the three month summer gap was too long and risked our central bank being caught on the back foot by developments in the rest of the world - bearing in mind that most significant economies in the globe don't disappear for their summer holidays during the time we do.

Now I've been given another reason to not like the new format.

Out with tradition

Yes, seems now that the RBNZ Governor's tradition, established in 1995, of giving a public, on-the-record speech to the Canterbury Employers Chamber of Commerce, setting the scene for the year ahead has now been, effectively, canned.

Rather meaninglessly, so far as I'm concerned, Governor Graeme Wheeler will now give an off-the-record speech to the chamber of commerce that contains no new information on monetary policy. Why bother? Some comments behind closed doors to a select few who probably already know exactly what the Governor might say and won't be influenced one way or another by these 'new' comments.

Also, why when the RBNZ has known since mid-2015 that it would have the clash between the Canterbury speech and an MPS two weeks later did it not either seek to move the speech - thus retaining it on-the-record - or at least let the market know rather earlier that the traditional year-opener was being canned, or more to the point, neutered, this year. Clearly at least some bank economists did not know last week that the speech would be off the record - because they were making comments in anticipation of the speech.

I can see the RBNZ logic that there was peril in the Governor giving a forward-looking speech only two weeks ahead of the release of the full MPS with its detailed economic and financial forecasts. The RBNZ also makes the point that its published speeches "are more driven by dynamic strategic communication needs than by the coincidence of a host’s event timing". Specifically the RBNZ can point to the fact that the new February timing for a Monetary Policy Statement will enable it to include important data such as this week's inflation figures in the updated economic forecasts.

Anything could happen

But I don't think this need have stopped the Governor giving some views on what is an extremely colourful global environment in which virtually anything could happen.

For me this all serves to highlight the lack of sense in the decision to move to the new OCR timetable because it's just so inflexible now.

I think 'dynamic strategic communication' should include trying to reach the public and get the public onside with what you are doing - and it's not enough to just talk through the markets all the time.

I think it just works to have a 'holding' OCR decision in January (but leaving the option for some action if its really needed), followed by the Governor setting the scene for the year in a visible and human fashion - not like the turgid, oh-so-careful, but impenetrable-to-the public release of an MPS document and the turgid, forced, media conference that follows.

But there's other issues here that add to the intrigue too.

Time up

Wheeler's five-year term as Governor expires in September and there's been no indication at all whether he's looking for another term - or whether such would be granted by incoming Finance Minister Steven Joyce.

Such decisions will have to be made very much sooner rather than later.

It's worth noting that in 2012 the then Governor Alan Bollard announced on January 30 that he would not be looking for another term. This gave time for an official search for a replacement, with Wheeler announced as the new Governor by then Finance Minister Bill English in June 2012.

So, given this historic precedent, with a formal announcement at the end of January, the assumption is that these decisions on the Governor's term are all due to be made pretty soon.

Approached for comment this week on the timing of any announcement, the RBNZ said it couldn't give any indication.

Take what you will from that. I take that some announcement is probably imminent.


The other point I throw in here is that the RBNZ as part justification for holding this speech off the record, says it doesn't want to risk confusing the markets so close to the MPS announcement.

If we want to talk about confusion, let's go back to last year.

On January 28, 2016, the RBNZ released it's one-page press release leaving the OCR at the then level of 2.5%. Undoubtedly the RBNZ would have viewed the market reaction as reasonably positive - the Kiwi dollar continued its recent downward path, and interest rate swaps fell.

On February 3 Wheeler gave the Canterbury speech, on-the-record and including such language as how the RBNZ would not 'mechanistically' cut rates to increase the rate of inflation. Interest rate swaps rose slightly. The kiwi dollar rose rather more strongly - something the RBNZ expressly did NOT want.

The RBNZ has subsequently been fairly defiant about that speech, in effect claiming it was misinterpreted. I've read the whole speech a few times and it still reads to me like the words of someone who was hell-bent at that stage on not reducing interest rates any more.

If the market was a bit confused, it became rather more confused on March 10, 2016 when the RBNZ cut rates to 2.25%. Two more subsequent rate cuts in 2016 took the OCR to its current 1.75%

If I were Graeme Wheeler, I don't think I would have very fond memories of the Canterbury Employers Chamber of Commerce and of speaking there. So perhaps off-the-record will be just fine for him. But I think the country deserves more.

The disappearing Governor

In his first full calendar year as Governor, Wheeler gave (according to the published records on the RBNZ's website) five public speeches. Then there were seven in 2014. Then just three in 2015. And last year? TWO.

(Though there was another speech last year that was written by Wheeler but delivered by Assistant Governor John McDermott).

There was a 10-month gap between the first and second speeches that Wheeler actually delivered.

It's true that more on-the-record speeches have been given by other senior RBNZ officials, particularly the deputy and assistant governors. But however much Wheeler might internally want to operate as part of a committee, externally he is the guy that counts. He's the guy on the $600,000-plus salary with whom the buck stops. And the public want to hear from him.

Sure, there's an argument that says a communications strategy can't be measured simply by how many press releases, speeches etc are put out. Absolutely. But the flipside is that if someone in public office disappears publicly for long periods then misunderstandings about them, what they do, and how effective they are, will only increase.

The RBNZ is an organisation that has a big influence on the interest rates we pay and what we can or can't borrow for a house - more so than ever since the advent of LVRs. I think that makes it publicly accountable.

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Confusion and lack of confidence and direction.

I dont agree , our economy is still cooking , Wheeler could be genuinely worried about the economy overheating , and he cant say too much about what he intends to do about the risk of overheating .

A lowering of accountability by a public institution.
Any necessary monetary easing since 2009 has only been done extremely reluctantly.
Hence the January 2016 statement.
The Christchurch earthquake also forced their hand on easing.
But in fairness the RBNZ has been facing govt fiscal tightening, massive waves of foreign-sourced finance pouring into housing, and banks uncoupled from the OCR. So, really, what can they do?
An OCR of 1% or 3.5% - what difference would it make?

I disagree , do you remember his predecessor ?

He certainly did not tell us everything he knew

Dr Allan Bollard was not at liberty to tell the public about what he had discussed with other Central Bankers in the lead up to the GFC .

Maybe we are unaware that we could be staring down another similar GFC mostly caused by QE .

What we do know is that the World Economy is quite unstable

Who is pulling the strings. The RB Governor is supposed to be independent of the government, but is he. I get the impression that there has been a bit of tension between them. Has he been muzzled? Does he not want to stand up and defend actions that he was forced to take. Your reading of his earlier speech suggests that he did not want to lower the rates and I said at the time it did not seem warranted. The subsequent performance of the economy certainly confirms it definitely was not required.

Poor Wheeler still waiting on Bill to approve the Debt to Income Ratios... looks like the fact there is an election this year stopped that in its tracks...

With the OCR currently at 1.75, floating mortgage rates are now pushing 6%.
So if the OCR was dropped to 1.5%, what effect would this have on mortgage rates?
If the OCR was hiked to 2.0%, what effect would this have on mortgage rates?

Which mortgage rates? Fixed, or floating?

Most likely nothing as the link between he OCR and interest rates currently seems broken ( if it ever existed).

...Almost as crazy as a Ted Stanton comment.

Why - please enlighten us with your wisdom. No spray and walk away.

You are the one who sprayed and walked away by saying "Most likely nothing as the link between he OCR and interest rates currently seems broken ( if it ever existed)."

I object to that statement on the basis that there is a pretty strong historical relationship between the deltas of OCR and retail interest rates...

You assume association means causation. In the recent past dropping the OCR has had little or no effect on interest rates.

Wrong. I assume causation means causation.
It would be very peculiar if we couldn't support causation between federal funds rates and retail rates over the long and medium term..

Recent past? The last year?
There is no robust data, nor robust econometric model, that support would your claim that there is now no relationship between them.

Out of interest do you have a graph showing the OCR v inflation and OCR v Bank rates.

I am guessing the OCR v Inflation would show causation, but it would be in reverse. i.e. Inflation would preempt an OCR change.

As for OCR v Mortgage rates, that would effectively show a semi random grouping. OCR goes up so do rates. OCR goes down, rates don't change. OCR doesn't change, rates go up.


You'll have to be dilligent and scrape the OCR data yourself.
If you get really excited, run an ECM or delta OLS over it. I am confident you will see a pretty good relationship between the two.

Interesting that no one provides this sort of graph. Personally I don't have the time .

RBNZ are all about transparency. Bu they key points you want to look at become DIY.

I expect to see a relationship, but the relationship will not show the OCR leading.

What would you expect the graph to look like?
It would be very stepped and flat.. Unless it was overlaid, it would be pretty boring..

You are wrong if you expect to see retail mortgage rates/deltas leading OCR rates/deltas...


If money lent nationally could be funded by savings held nationally, then there would be a clear link.
A good chunk of lending done by banks in NZ is sourced on the open Money Markets, and the price of money is going up due to factors such as interest rates rising in the US.

STOP ........... We need to give the RBNZ Governor some space here .

Firstly , he is under no legal obligation to tell us everything , we have Treasury reports , economists , and all manner of opinions from academics to politicians and the IMF World Bank and ratings agencies to advise us publicly

Wheeler may have said or wanted to say something quite innocuous like outlining a " what-if" worst case scenario , and wants it kept under wraps. ( It may never happen ).

Or he could have serious reservations about the ability to stoke any inflation ........ he cannot admit this in public .

There are clearly some issues of serious concern to him , that if they were expressed in public could lead to alarm , or despondency .

I guess there could be 4 things troubling him .

The first is the Banking sector , and he cant say negative stuff about banks in public . They have been irresponsibly throwing money about like drunken sailors , and its inflated asset prices as a result .

Banks should be told , no one is to big to fail .

The second thing I reckon he is really concerned about the "D" word......... Deflation .

Deflation is way worse then inflation

Strip out Auckland property , and a slight increase in petrol prices this month and we are in a deflationary cycle . This is a personal opinion , but as a meticulous keeper of records , I can honestly say that with a family of 5 , our personal cost-of-living has declined in the past 3 years . When deposit interest rates collapsed , we cashed in our savings and paid off the mortgage , and our actual outgoings have simply not increased at all , and have declined in many cases . Its going to take some work to stimulate inflation again

The third issue is likely to be that in discussions about the world economy , his Central Banking mates overseas have told him just how unstable the global economy is , and he understands how it may impact us here . Mark my words , QE is going to come back as vicious as a dog with rabies , and bite all of us .

The fourth and final issue is the fallout from a trade war between China and the US . The consequences of this could see more instability if China tanks . We will be affected .

I agree with you about the cost of living reducing. I also keep records of our food spend and the daily/weekly average has been reducing for 4 years, despite my children growing older and bigger and therefore consuming more food.

And its not just food , our rates account dropped , our electricity account was down ( small%) our fuel account has dropped spectacularly , our cost of holidaying (airfares) was way down on 2007 and RUC has gone down

The things that went up were Warrant of fitness but it was only the older car ( the new one was down due to 1 year option)

We dont smoke , but the alcohol wine and beer ( esp imported beer) is down a small % .

Milk has stayed the same , as has chicken , but red meet on special is down , as is in-season fruit and veggies .

Clothing went down , but school uniforms bought locally distorted the number because we have bought some fashion and work clothing online or "on sale"

However, there are one main difference between the new movement spreading across the US and Europe in comparison to the struggling status quo. While still socialists, the new movement understand why the once affluent middle class of the western world are upset. They cannot make ends meet as they find themselves in a situation whereby the central bank target a domestic price level in a world where prices are set on global markets. To achieve a two per cent CPI target when import prices are falling due to the “China-factor”, it is given that non-tradable prices must grow far faster than two per cent. From this we can conclude that essentials, such as housing/rent, education, food and medical expenses will grow far faster than then aggregate CPI if the two per cent target is to be reached. Data from the Bureau of Labor Statistics substantiates this view.

While it is certainly nice to buy a new flat-screen TV imported from Asia on the cheap, it is not helping if housing, food and medical expenses already lay claim to all of household income. If these people dare vent their frustration, the urban elites call them racist bigots and effectively shut them down. Until 2008 Flyover America could effectively be silenced by giving them access to cheap and plentiful amounts of debt, which helped paper over the lack of real household income growth. When the credit channel broke down at peak debt, the harsh reality made itself felt.

Well described AJ

There have been mumblings from RBNZ about increased inflation. I'm not holding my breath as there doesn't seem to be much to drive it. However we do seem to have more spending power.

In terms of other central banks there doesn't seem to be a problem brewing. ECB have been concealing how bad the defaults are in the banking sector. Debt servicing by the banks appears to be done by way of cheque kiting. The Fed? Who knows. The US seems to be completely fraudulent and there does seem to be another loan problem brewing. Some external event could easily occur that pushes up the cost of overseas borrowing.

David, out of curiosity , as a journalist, do you attend the OCR briefings. You describe the meetings as turgid, on one hand, yet no journalist seems to truly question the RBNZ and their failings. Quite frankly Mc Dermott comes across as a wet towel , and often makes little sense, and Graham puts his glasses on and off at the rate of the OCR changes whilst regurgitating econ speak. I know in the past Bernard has raised some questions, but it truly appears that every journalist will lose their pass for the next free breakfast if any reasonable questions are raised.

I can let it go, Graeme sledgehammered the market in October nearly single handedly destroying the economy with one blow.

It is better that he hides himself indoors.

New Zealand must have a very poor economy if the NZRB making a change ( I assume you mean introducing the higher LVR) has as significant effect on the economy. That seems to confirm the view that the New Zealand economy is largely a ponzi scheme based on ever increasing house prices ( according to you - I am inferring this from you statement) ).

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