The Reserve Bank last week joined the global pack. If the world’s big central banks are lax, what choice does Graeme Wheeler have in this tiny backwater? And Bill English has shown no interest in lightening his load.
Back in 1990 Ruth Richardson used to complain Labour ministers’ fiscal laxity was making it harder for the Reserve Bank to hold down prices.
Now the reverse applies. English’s budgets’ fiscal impulse on economic growth is negative, constraining economic growth and prices. So the Reserve Bank is “accommodative” to both growth and prices.
Why? Because it is required to drive price inflation up to 2 per cent.
You who inhabit the real world, not the Reserve Bank monks’ “general equilibrium model” cloisters, might think falling or static prices is a good thing. Everyday life thereby gets a bit easier.
You might also know that the production cost for many of the goods and services you buy has been falling as digital technology works its magic.
So you might expect the Reserve Bank to suggest to English that he lower the bank’s mandated inflation target from 1-3 per cent (midpoint 2 per cent) to at least 0-2 per cent, where it was until 1996.
No go. Wheeler told journalists in the monetary policy statement lockup the target was “appropriate”. So, by hook or by crook, he will crank inflation up to 2 per cent. English backs him.
One reason their defenders give is that the target should be changed rarely and in today’s unstable global economy a new target may not stick long.
World financial markets are skittery. Share bubbles are puffing up. Economic trajectories are uncertain. The big central banks don’t really know how to get off their “extremely accommodative monetary policy”, the Reserve Bank’s description last Thursday.
They have held official rates near-zero (some sub-zero) and/or have printed money to buy government bonds, a third of which in the Eurozone traded in April at negative interest rates. The United States, Europe, Japan, Britain and, recently, China have all been at it — most of the world economy.
No one knows how long this can go on.
But listen to Reserve Bank of Australia (RBA) governor Glenn Stevens, the very day Wheeler cut our official cash rate. Politicians there, Stevens said, were relying too heavily on monetary policy. (Wheeler is too polite to say that to English.)
Stevens again: Sydney property prices are “crazy”. Warwick McKibbin, former RBA board member and an eminent Australian economist: “The distortion low interest rates is causing in asset markets is worsening.”
Australia’s official cash rate is 2 per cent. Wheeler has a way to go.
He (and English) rejected suggestions cutting the official cash rate might pump Auckland’s house bubble still more. Other measures, including Wheeler’s loan-to-value ratio restrictions and English’s sudden capital gains tax, are supposed to offset cheaper home loans.
English (and Wheeler) have other worries: the collapse of dairy prices which may well endure for at least another year, by which time many farmers will be underwater, as they say in the United States.
If so, at some point consumer spending will slow. Consumer confidence, already off its highs, will fall. The Reserve Bank’s own generally bullish projections show private consumption dropping in 2017. That will be an election bother for English.
Winston Peters, a pro-cut advocate, might at some point wake up to a potential contribution to this fall: that his special over-65s constituency will have less to spend as interest rates head south.
The good news is that Wheeler’s cut(s) might persuade foreign financial wizards that the “rock star” economy is off-key and to back off. That is how the Financial Times reported the cut: “New Zealand, like its bigger Antipodean neighbour Australia, is feeling the strain.”
If so, the exchange rate might fall enough to get Wheeler his 2 per cent price inflation.
That, of course, is bad news for you. Imports, a large proportion of what you buy, will cost more.
That’s not all. Houses aren’t the only assets. Wheeler noted “strong”, “particularly strong”, and “record high” world stock exchanges. The Economist worried this month about the Shanghai exchange’s rampaging index.
Wheeler: “Low bond yields encourage investors to turn to riskier assets”.
A share price crash is not the global financial crisis the world needs right now when indebted governments and zero-interest central banks have no buffer to offset the recession the Economist warned last week will follow.
Our 2014 election was held in a bubble, with households feeling some lift and modest expectation of better.
Take out 2013 dairy spike. Watch the Christchurch rebuild peak, then slow. Watch immigration, job and wage growth slow. Watch pressure build on the health system and other public services when more can no longer be done with less.
In 2017 John Key will need English’s tax cuts if he is to get a fourth term. Meantime, they require you to pay higher prices.