On Thu, 28 Apr 2022 15:46:10 +1200, Rich80105 <Rich...@hotmail.com
Apologies - I forgot it is Premium content:
The Reserve Bank has a formal objective to keep inflation in the range
of one to three percentage points, as specified by the Remit for the
Monetary Policy Committee, which was signed and "agreed by" the
Governor and Finance Minister.
This range constitutes the official definition of "maintaining
stability in the general level of prices" in the RBNZ Act. However,
both signatories to the remit have gone and wilfully ripped up their
Let's build the prosecution's case. Exhibit A is that the defendants
already admit it. At the last meeting of the Bank's Monetary Policy
Committee (MPC), members confessed that "annual consumer price
inflation is expected to peak around 7 per cent in the first half of
Are the shocks hitting us short to medium term? No.
The bank says, "A broad range of indicators are highlighting … ongoing
Has the misconduct of monetary policy, which has been inciting the
inflationary breach, ended? No. The bank says that the Official Cash
Rate (OCR) "is stimulatory at its current level".
Not only has NZ's inflation target been ignored, but those responsible
for achieving it are still pouring gasoline on the fire.
Exhibit B comes from Professor John Taylor, inventor of the "Taylor
Rule". That rule is a simple formula explaining how a Central Bank can
quell an inflationary shock. It has proved a robust guideline when
setting Official Cash Rates around the world.
The rule states that an increase in the OCR of more than one
percentage point is required when inflation increases by one
percentage point. The reason is to ensure that real interest rates go
up to reduce borrowing.
Without a rise in real rates, debt-financed spending can continue to
So what's been going on in NZ? Annual inflation, measured at March
2021, was 1.5 per cent. Annual inflation at March 2022 was 6.9 per
cent. In other words, inflation has risen by more than five percentage
points this past year.
However, the RBNZ has only increased the OCR by a little over one
percentage point over the same period, sending short-term real rates
The Taylor Rule is powerful evidence that there has been no intention,
whatsoever, of our authorities to meet their obligation of keeping
inflation on target.
Exhibit C is NZ's record-low unemployment rate, which stands at 3.2
Unemployment sharply increasing would have been a justification for
holding back on steep hikes in the OCR to contain inflation. Yet the
MPC says "employment is above its maximum sustainable level".
In their defence, the Governor of the RBNZ and Finance Minister have
claimed others are doing the same.
"Global consumer price inflation is high, well above most central
banks' targets", argues the Monetary Policy Committee.
Attempts to present the situation abroad as being the same as in NZ
Although the US Federal Reserve also has a mandate of "stable prices",
these words are not defined in terms of an inflation target that has
ever been "agreed" by the Fed Chair and US Treasury Secretary.
For most of its history, the Fed baulked at providing even its own
A target did emerge when Ben Bernanke was chairman but the Fed
subsequently changed it into one that was intentionally vague and
ambiguous. Targets are not all alike, contrary to the MPCs
In stark contrast, our RBNZ has no discretion to play around with the
meaning of price stability. The point of the explicit inflation target
signed off between the RBNZ Governor and Finance Minister has been to
"provide a clear agreement between policymakers, thereby limiting the
scope for discretionary policy actions", to quote Adrian Orr, writing
for OECD Policy Studies in 1994.
So what has been driving OCR decisions? Populism.
After keeping the cash rate so low for so long and embarking on a $53
billion Quantitative Easing (QE) programme, the bank is now in panic
mode. It is panicking at the prospect of a full-on policy reversal
that will highlight past mistakes and provoke widespread debt
Those having trouble paying back their mortgages in the next few years
can blame our RBNZ Governor and Finance Minister. They encouraged a
borrowing binge to buy houses at wildly inflated prices, financed by
dirt cheap credit, turning a blind eye to the breach of the target to
which they mutually agreed and not learning the lessons of the Global
Financial Crisis in 2008.
The RBNZ was once lauded around the world for making NZ exceptional.
It pioneered inflation targeting. We became the gold standard of
Now our hard-fought success and huge reputation built up over 30 years
lie in ruins.
Exhibits A, B and C reveal how the RBNZ and Finance Minister have
overseen the trashing of their "agreed" inflation target.
The official defence is that other Central Banks are just as bad.
That's not true. Not one of them operates under the same laws as ours.
The US Fed Chairman and Treasury Secretary have not broken any
agreement. By comparison, our RBNZ Governor and Finance Minister have
driven a truck through the single most important agreement
underpinning our economic security since 1989.
• Robert MacCulloch is the Matthew S. Abel Professor of Macroeconomics
at the University of Auckland.