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 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.
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: