Why your borrowing rates are higher than they should be

What do you call four years of consistently mis-forecasting inflation by a $50 million government agency set up to do just that? Whatever word you use, it should cause you to ask some questions about how our Reserve Bank is being run.

Analysis by the Parliamentary Library of Reserve Bank inflation forecasting versus the actual inflation rate shows that the Bank has consistently failed to accurately forecast inflation over the last four years, resulting in a higher Official Cash Rate (OCR) than was needed to control inflation.

What does this mean, practically speaking? It means interest rates have been higher than they should have been:

  • Anyone with a mortgage is worse off as a result of the stuff up;
  • Any business borrowing to expand their enterprise has had to spend more on loan servicing as a result of the stuff up;
  • Anyone wanting to work has found it more difficult to get a job as a result of the stuff up.

The stakes are huge. By the Bank’s own numbers, a 1 percent rise in the OCR reduces economic output by 0.5–1.0 percent and increases unemployment by 0.5–1.2 percent.

And we’re not the only ones noticing that the Bank has been failing to do the key thing it’s tasked to do well. Last week, Tony Alexander, Chief Economist at the Bank of New Zealand, criticised the Bank’s inflation management saying, “The Reserve Bank is well away from doing its job of keeping inflation between 1 percent and 3 percent over the business cycle.”

The Finance Minister has consistently downplayed the Bank’s failings but has admitted that the bank had not met the inflation targets set in its agreement with the Government. It’s time for Bill English to find out what is going wrong at the Bank and whether the failings are actually systemic.

The Treasury has previously recommended a review of how the Reserve Bank makes its decisions, and so has a former senior staffer there, Michael Reddell.

The Reserve Bank is like no other in the developed world in that it still gives full responsibility for the OCR decision to just one person – the Reserve Bank Governor. This is all well and good when we have a competent Governor in charge, but what if we have one that turns out to be a dud?

We’d like the Bank’s governance arrangements to be modernised, which probably means the Board will collectively be responsible for setting the cash rate. Other improvements we’d like considered in a review include:

  • Board members selected from a wider cross-section of our economy including those representing workers, manufacturers, and the primary industries;
  • Greater transparency of the Bank’s Board meetings and OCR decisions by publishing the Board’s minutes within 14 days of meeting, like most other central banks do;
  • A broadening of the mandate of the Bank from solely looking at inflation to include references to “full employment” and/or “economic prosperity” like they do in Australia and the USA.

James

 

The chart that tells the story of how bad the Bank’s forecasting has been, not just once or twice, but consistently over the last four years:

Reserve Bank mis-forcasting graph
Reserve Bank inflation forecasting. Sources: Parliamentart Library, Statistics NZ, Reserve Bank Monetary Policy Statements

8 Comments Posted

  1. I agree bj. If we look at the only justification for selling our land to foreigners, the helping of less well of other nations, we see foreign ownership is only flowing to nations with good economies. The people investing here are accumulating money in places like India, China, Britain, and coming here for what. A better life or safer investments. Safer investments mean they are not prepared to invest in their own economy to improve that but want an easy answer based on self interest. We don’t even check much if the money comes from good business or from opportunism, even money laundering.

    The point I am making is the system encourages investment and occupation from people that probably have self interest as a key motivator. This is bound to erode community and social good if allowed to grow too much. This means the community pays. With lower taxes on those at the higher earning end and investing this means the citizens are subsidising the gains tto the asset sellers. Banks are encouraging this process and if the bubble bursts will want to sell more to foreigners to cut their losses. This Government also changed the bank laws so banks can take savers money to cover their losses if the bubble bursts. This further protects those making bad financial/economic decisions in a system that is claimed as free market. Those saving are well advised to save with good banks with a community base.

  2. DB – I can’t imagine why you’d think that the record profiteering of the banking sector has a lot of explanations past dishonesty. What I said about FOREX is simply true. They’ve admitted wrongdoing to avoid being convicted of it, and are paying billion dollar pittances against an amount of money that we can at present only guess was stolen from the rest of the world. That they were so quick to accept the deals argues that they were given a hell of a bargain.

    So what we have is a former banker with a high likelihood of serious dishonesty in his past, running THIS country and the bankers making record profits. This has implications about the answers that have been excluded from consideration by his government, and why those answers are excluded. We see him selling stuff that isn’t his to sell, negotiating away national sovereignty and presiding over a hollowing out of the NZ economy into something resembling best a successful banana republic. New Zealanders never cease to amaze me with their willingness to provide a gullibility fill when their dear leader offers them a credibility gap.

    So the banks make record profits while everyone else in the economy struggles. Just that fact alone SHOULD tell you that there is something wrong.

    This country should have a land tax, laws against foreign ownership, a reduced GST, an increased rate at the high end, and a capital gains tax. It should NOT have negative gearing and the government should be building houses, not selling them to foreign owners. At some point the notion that this is all about “free enterprise” has to be shot in the head.

    There is no free enterprise, and there is no free trade, any more than there is a free lunch.

    This business about making New Zealanders work harder for less has to be shot in the head too. This business of being “Mexicans with Cellphones” is rubbish. Who is working for what here. The bulk money being made is being made in areas where no actual work is done. It is the owners making money by owning, buying and selling stuff, and Auckland property is one of the worst offenders. The housing market as a whole (and not just in Auckland) is completely munted by the policies in place. Real money is earned only by those doing real work to produce stuff. Not by owners. There is something deadly wrong here and it is not getting better with either National or Labour running things.

    Key is merely the most recent offender.

  3. How about political representation on the board too, and part of that decision making? The independence of the reserve bank in setting he OCR was a radical move in the day, and getting it out of the hands of politicians was a good idea, BUT setting the OCR has huge political ramifications and they do deserve to be considered along with every thing else.

  4. Oh dear!

    The wealth disparity is not increasing.

    Home ownership is not a fleeting dream for the one wage average family.

    Banks only loan your deposits.

    The Govt is doing everything they can to help young prospective house buyers.

    Rents are not sky-rocketing .

    Foreign investor ownership of spec houses is well documented and the public can track it.

    Poverty does not feature in NZ families.

    Yeah Right!

    Market rulz OK.

  5. BJ, I think your second para misses the mark a bit; you’re ascribing to banking profits and corruption that which is far more easily explained.

    There is no doubt that, in the language of the markets, the continual rise in house prices, particularly in Auckland, but now spreading (see [for] and [against]) is, in the language of the markets, a rise not explained by fundamentals. Thus it is wrong, and cannot continue forever. Ordinarily, one would assume that sooner or later, there will have to be a “correction”. It is widely assumed that off-shore money is fueling this growth.

    Although we continually hear about the negative effects of the house price rises, there is a silent group of everyday Kiwis who are quite happy about this rise, as it personally benefits them, and I think this group vastly outnumbers the disadvantaged, they are a silent majority.

    Furthermore, I think this gain in wealth of this boatload of people is the basis of the shift to the right that the country has experienced. So widespread is this shift that it is simply no longer possible for a government to the left of where National are today to become elected. (These are the “politically relevant” voters)

    Thus I think that the possibility of a house price correction is one of the few things that disturbs the sleep of our beloved PM. Lets face it, the current mob have been hit with mud time after time (just ponytailgate, TPP, dirty politics in the last little while, there is more) and much to the consternation of the left and the media, this has had pretty much zero impact on the polls. This is because the stability of the National support is based on the increasing paper wealth of everyday Kiwis.

    Short of a house price crash, which will be very damaging all round (unless, of course, you are a first time buyer) this isn’t going to change. And when the crash does happen, the societal impact of parents losing there wealth and their houses and their children gaining houses “for nothing” will be enormous, families will be ripped apart.

    National doesn’t want this house price crash to occur, because it will be bad for their party, particularly since they are grappling with a succession strategy; they want this National generation to be about more than just Key. Thus don’t expect too much to actually happen to address the issue.

  6. The RB is tasked (informally I am sure) to attempt to control Auckland housing prices because the government is ideologically opposed to doing anything that would actually alter the housing love affair in NZ (the only game in town for most New Zealanders).

    At the end with John Key as the former “banker” (actually FOREX speculator, with FOREX being one of the most corrupt financial “markets” in the long history of corrupt financial markets) we see the banks making record profits year on year and everyone else in the country sucking hind teat.

    Any suspicion that this game might actually be honest, died long years ago.

  7. The private banks have had a ball with rising rural land prices making farms untenable in the long term as well as the ponzi house price investor driven bubble with banks issuing record mortgages pouring new money into the pool. Extremely profitable for banks at NZ’s expense.

    On top of that the uncapped overseas transfer of money into NZ to drive the farm acquisition along with the housing fiasco, all drive the value of money down – inflation.

    The immigration privilege for wealthy brings buyers of our assets without necessarily adding to our production or supply / service economies.

    The setting up of foreign owned export chains from farm to off shore consumer diminished our returns from assets and local labour.

    The GDP measure is also masking what is really happening.

    Shocking management of NZ’s interests by a Govt who are authors of the mess.

  8. The graph clearly demonstrates that the Reserve Banks default position / first consideration is always to protect the big 4 ‘s ability to strip-mine the NZ economy .

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