Pattrick Smellie: A hacker’s guide to monetary policy

Free advice can be hard to take for Reserve Bank governor Graeme Wheeler, especially when it's contradictory.

Free advice can be hard to take for Reserve Bank governor Graeme Wheeler, especially when it's contradictory.

OPINION: You know how it is. You're enjoying a perfectly good game of hacker's golf when the free advice starts up.

"Keep your head down", "your feet are wrong", "do you always hold your putter like that?"

If you're a politician, every day is like a day of bad golf, but at least you signed up for it.

When you're governor of the Reserve Bank, you've usually come from a more rarefied career in the economic sphere. The free advice can be harder to take, especially when it's contradictory.

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So it is for the current governor, Graeme Wheeler. 

As his deputy governor, Grant Spencer, wings his way to Jackson Hole, Wyoming for the annual global central bankers' retreat this weekend, the free advice has been coming in thick and fast.

As Britain's Daily Telegraph's Matthew Lynn put it, central bankers are meeting "in a world awash with printed money, with deflation becoming permanent, with bonds from major economies paying negative yields, and with weirder and weirder experiments, from below-zero rates to abolishing cash, gaining increasing traction".

Mortals on the sideline are worried, suggesting inflation-targeting monetary policy as we've known it for the last 30-odd years may be broken, but with no credible alternative approach emerging.

After all, is it even true to say in New Zealand's case? Prices are stable, the economy's growing at 3 per cent, what's the problem?

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Answer: the fact that no amount of monetary policy tweaking can raise inflation to its target annual rate of 2 per cent, and that efforts to lower the value of the New Zealand dollar often achieve the opposite.

That happened this week after the speech delivered on Wheeler's behalf in Dunedin. Cue head-shaking and knowing chuckles from the sideline.

However, the speech was instructive in describing the practical problems that Wheeler faces and the contradictory range of advice he is currently receiving.

That advice comes in three main forms:

- Interest rates should be cut faster

- Interest rates have already been cut too much, and

- Inflation-targeting doesn't work anymore and some other target is needed, even though Reserve Bank's Policy Targets Agreement already allows judgements about factors such as employment and the domestic and international economy. 

On the first criticism, Wheeler argues that if he cut interest rates savagely, he would run out of room to react to a new global financial crisis – a credible scenario, especially if any country's debt mountain goes suddenly bad. And while a deep interest rate cut might drop the dollar's value, recent experience suggests it wouldn't last. 

On the second criticism, he reasons that if financial markets thought the Reserve Bank had finished with rate cuts, the kiwi would rise immediately.

Better to keep them guessing, expecting more cuts, and take such heat as possible out of the currency, he reasons.

And on the third suggestion, the argument is that there's no international consensus to change from inflation-targeting and that targeting a lower inflation rate would undermine confidence in the Reserve Bank's commitment to meet hard goals.

That last argument seems most contestable. The Policy Targets Agreement has changed before and could change again.

If a structural change to lower global inflation has occurred, then that should be possible to recognise although, ironically, the dollar might rise if the target were lower.

At the very least, however, the agreement represents a valve for dealing with the mounting pressure on the central bank's credibility.

Moreover, any change lies with the Government rather than Wheeler himself, which gives him a certain amount of cover.

There's no sign that any such free advice is about to be taken, but as the divots mount up, politicians if not central bankers, may start feeling the urge to take it.

- BusinessDesk


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