The PM has basked in the glow of approving publicity overseas – but the dollar’s dive should bring her back to earth

Prime Minister Jacinda  Ardern  has won lots of favourable publicity, while attending  the  Queen’s funeral  in London and the  UN  General   Assembly  in  New York.

It was  a  sombre  mission  in  London,  less  so  but  no  less  tiring in  New  York  (although the nuclear threat from Russia was sobering).

On  both  occasions, Ardern has represented  the country so  outstandingly  that  New  Zealanders  for  a week  or  two  might have  overlooked  how   poorly   the government  has  been performing  at  home.

Indeed,  one  commentator – Matthew  Hooton  in  the  NZ  Herald –  suggested that if  NZ  became  a  republic  he  would back  Jacinda  Ardern  for president.

Nobody,  he says, better  personifies  contemporary  New  Zealand globally and  in  national celebration or  grief.

RBNZ governor must curb inflationary pressures while keeping an eye on employment trends

Reserve Bank governor  Adrian Orr   has  a lot on his  plate  at present. He  is  battling  to hose  down prices which have  been rising  faster  than they  have  done for  30  years,  while  at  the  same  time  “maximising” sustainable   employment.

It’s  a  task  none of his predecessors had  to undertake.  Finance  Minister Grant  Robertson  widened  his  remit  to include full employment, but probably  didn’t  expect the  job  being put  to the  test so soon.

And, of  course,  Robertson’s future  as  finance  minister  will  hang  in the  balance, particularly  if  inflation  is  still raging  when  electors  go the  polls  next  year.

Ironically, too,  it  was the   government’s decision for  the  printing   of  money  by  the  Reserve  Bank  as  the  country  returned  to  something  like  normal  after  the Covid  lockdowns, which  stoked  the fires  of inflation.

Some  might  see   elements  of  Greek  tragedy   taking  shape.

Here’s the challenge – branding the RBNZ a success when inflation has raced far beyond the 2-3 per cent target zone

David Farrar has drawn our attention to a splendid job opportunity at the Reserve Bank.

No, not to pitch in to meet the challenge set by The Governor and the Treasurer’s agreement that the appropriate target for monetary policy is to achieve an inflation rate of 2–3 per cent, on average, over time.

Rather, the RBNZ intends to appoint a Team Lead Brand and Design, to lead

“… a small but busy team of design specialists to work actively and collaboratively across the organisation to produce engaging brand and related content.”

Alongside this the appointee will:

• Develop and maintain the RBNZ’s brand and design strategy
• Work closely with others to plan and support the development of website content, social media content, initiatives and campaigns
• Ensure the design team has a clear programme of work and is efficiently managing daily production workflow
• Produce engaging collateral and digital content – this is a hands-on design role as well as a leadership opportunity
• Evolve and maintain brand and design processes, templates, assets and guidelines and ensure these are communicated and understood across the business.

But Farrar raises a good question in the headline of his Kiwiblog post: Why does the Reserve Bank have a brand team?

Mortgage holders will wince as RBNZ takes another shot at bringing inflation back into the target zone

The  Reserve Bank  has  raised  the  official cash  rate  to  2% – but will  that  slay  the  inflationary  beast roaming  the  countryside.? 

Point of  Order   doesn’t  think  so.

Reserve Bank governor  Adrian  Orr made  the right  belligerent  noises  as  he  fired  the  bullet  today  but  he  needed  a  fiscal -policy volley  from  Finance Minister Grant Robertson  to  demolish   the  monster.

Inflation, according  to Robertson,  is  all  due  to overseas  factors — the  war  in the  Ukraine, supply  chain  congestion,  China’s  economic  problems,  you  name  it  — but  little  has  been  done  to  contain  it in  the  term of  the  Ardern  government.

As Professor  McCulloch pointed out  in the  NZ  Herald with reference to a  document  signed  off   and “agreed by”  the Finance Minister and Reserve Bank Governor, it says inflation in NZ is to be held at 1 to 3 percent over the medium term.

A smack in the face from inflation

Roger Bootle is a British monetary economist.  He had a good run a few decades ago.  Since then, his warnings about monetary instability and inflationary risk have appeared less prescient.  

But the next few decades may be kinder to him (if not to us).

The govt pumps $24.2m into job programmes – but look how the Treaty (or something) has determined the allocations

Young Maori should do nicely, thank you, from funding numbers bandied today by Social Development and Employment Minister Carmel Sepuloni.

And non-Maori young people?

Sorry.  They don’t loom so large in the distribution of Sepuloni’s largess.    

The Minister announced that more than 800 jobseekers will be supported on pathways into employment, education and training through funding into the Māori Trades and Training Fund (MTTF) and He Poutama Rangatahi projects.

The numbers she bandied in dollars terms add up to $24.2 million.

But ethnicity will be the critical factor in determining who benefits.  The lion’s share of the investment, almost 77%, is going into the Māori Trades and Training Fund.

Sepuloni said this will support over 500 Māori job seekers into employment and training opportunities, with $18.576 million committed to a range of new and existing projects.

The rest of the nation’s young people can’t complain they have been overlooked.

The Government is investing $5.6 million to help over 300 young people overcome barriers to employment, education and training through further funding into He Poutama Rangatahi (and we assume non-Maori are intended to benefit from this programme).

Reserve Bank gets green light to tighten lending rules for housing (hopefully without impeding first-home owners)

The Reserve Bank has been given the government’s go-ahead to tighten mortgage lending rules to try to take some heat out of the housing market.

An updated Memorandum of Understanding between the Minister of Finance and the Reserve Bank will enable it to implement its proposal to reduce the amount of low-deposit bank lending banks for mortgages.

Announcing the updated MOU, Finance Minister Grant Robertson today said the central bank has proposed reducing the amount of lending banks can do above a high Loan-to-Value Ratio (LVR) of 80 per cent.  This lending will be lowered from 20 per cent to 10 per cent of all new loans.

Consultation will start with banks later this month, with a view to introduce this from 1 October, 2021.

The central bank also intends to start consultations in October on implementing Debt to Income (DTI) restrictions and/or interest rate floors.

Grimes’ grouches with the effects of govt policies on Kiwis’ wellbeing may sting more than the Groundswell protest

The  Ardern  government may  have been  stirred,  but  it  wasn’t  shaken,    by  the  nationwide protest  by  farmers  last  Friday.  And no matter how  far  the protest may have  turned   heads   in  the  rest  of  the  population,   it  leaves  farmers  no  further   advanced  in  persuading  ministers  to  modify  or  revise  the  policies  which  their  action targeted.

So  if  ministers  won’t  back  down  on their  environmental reforms or their climate change  policies,  where   can  the  farmers  go?  Parade  through  Wellington  to  Parliament?   Mount a 24-hour  vigil  in  Parliament  Grounds?

So  far  there has  been   silence  from the  originators   of  the   Groundswell  and if  there  is  a  new  sense of  unity  in  the  rural regions,   it   has yet  to  be  channelled into the  kind  of  pressure that   automatically  achieves  change.

Farmers may be disenchanted with being  told  how to farm, but the  evidence of climate  change  has  been  rammed   home in  the  provinces  in  recent  days hard  enough  to  convince  churlish  sceptics  of  the  need  for urgent  climate  action.

Financial Times chips in with some advice to our Finance Minister on the folly of adding housing to central bank’s deliberations

A Financial Times leader delivers advice that Finance Minister Grant Robertson should (but probably won’t) consider.

Essentially, the advice is to resist the temptation to  involve the central bank in the challenge of slowing the rise in house prices.

Changing regulation and reforming planning law is a smarter way to go.

The FT observes that – to many – it may seem obvious that the central bank quantitative easing programmes launched after the 2008 financial crisis have led to inflation, as money printing inevitably does.

But the inflation has shown up in booming stock markets, high prices for art and collectibles, and surging cryptocurrencies.  Rather than higher consumer prices, cheap money has led to asset price inflation.

In this reading, the FT says, central banks should reconsider their stimulus policies because they are only delaying and deepening the eventual bust.

Furthermore, according to the critics, stimulus is increasing wealth inequality and worsening housing crises.  Higher asset prices increase the net worth (as measured by market prices) of those who already have substantial wealth while leaving the position of those without assets unchanged.

Similarly, it pushes home ownership further out of the reach of those lacking in savings or inheritances — inflation that shows up in assets but not wages is particularly bad news for affordability.

The FT explains that this is why New Zealand’s government has instructed our  central bank to consider the effect of its policies on the housing market.

The centre-left administration of Jacinda Ardern has said that while the Reserve Bank will remain independent, it will have to take into account the government’s objective of “sustainable house prices”, which includes taming investor demand, when making policy decisions.

It is true that a fall in interest rates will increase asset prices, all other things being equal. Lowering the cost of borrowing should make it more attractive to buy long term assets, such as housing, that bring benefits that can last for decades.

Indeed, encouraging investment spending is part of a central bank’s motivation for cutting rates.

But to refer to a change in the price of assets relative to everything else as inflation — which means a change in the value of money — is a misnomer. A change in a particular set of prices is not the same as a change in all prices: houses have become relatively more expensive to all other goods and services in the economy, not just the Kiwi dollar.

Engineering deflation in consumer prices to address the particular, idiosyncratic, problems of the housing market would be a serious mistake. Using tighter monetary policy to reduce the price of real estate would also have the effect of reducing workers’ wages — a central bank-induced recession would ultimately do little for affordability.

Interest rates cannot be used to solve every problem and central banks have struggled enough to try to hit their existing inflation targets.

As the institution responsible for financial stability in New Zealand, the Reserve Bank should consider whether it has all the necessary “macroprudential” tools to address concerns about the housing market.

In November it already announced tighter restrictions on high loan-to-value mortgages. Requiring would-be homeowners to have bigger deposits will do little to address concerns about affordability, however.

Central banks, however, make a convenient scapegoat for politicians who are unwilling to take on the vested interests that can create an artificial scarcity of housing even in a land-rich country such as New Zealand.

Changing regulation and reforming planning law is a more sensible way to address the deficiencies of the housing market than running a monetary policy that would not be justified by the inflation and unemployment data.

In short, to solve New Zealand’s housing problems, “Ardern’s administration will need to look much closer to home”.

Robertson – of course – seems unlikely to be greatly bothered by the Financial Times, having  disregarded the advice of the governor of the Reserve Bank on this matter.

RNZ reported him as saying the government needs to use all the economic tools available to try to control escalating house prices.

Robertson is defending his decision to change the Reserve Bank’s remit to include house prices in its monetary policy considerations.

That is despite the bank’s governor, Adrian Orr, warning him last year that that was not a good idea.

Robertson said the government is not saying the Reserve Bank should be responsible for house prices – but the government needs to pull every lever within its power to tackle the housing issue.

The government was not suggesting the house-price crisis was entirely the responsibility of the Reserve Bank, Robertson said.

“What we are saying is that all parts of the apparatus need to be working towards these goals.”

Robertson said the government has been considering a wide range of options on both the supply and demand side of the housing market.

Can the world economy continue to float on a cushion of debt?

Monetary policy is difficult.

Economist Scott Sumner describes in his blog how the thinking of an intellectual giant like John Maynard Keynes evolved through three distinct phases in the 1920s and 30s.  As the man himself is reputed to have said “When the facts change, I change my mind.  What do you do?”.  Sumner then argues that the thinking of the economics profession repeated pretty much the same pattern of evolution over the last decades of the twentieth century.  

It makes a persuasive case for intellectual humility in general, and in monetary policy in particular.  Even more so in unusual times.  The forcefulness and fluency of experts can conceal the fact that they are testing new ideas when they make policy.