Despite the best efforts of the libertarian paternalists to sell the other people are stupid fallacy, ordinary New Zealanders are quite nimble at moving between fixed and floating rates depending upon their forecasts of the future of interest rates. Price controls on floating rate mortgages, as suggested by the New Zealand Labour Party, would make this more difficult, not easier.
Anyone who had a good idea about what the the New Zealand dollar should be would be trading on their own account. These super-rich would not be wasting their time giving advice to others. Their time would be too handsomely rewarded for such meagre returns as pontificating to others as to what they should do with their portfolios.
One of my delights as a bureaucrat was at a meeting between the Reserve Bank of New Zealand and the International Monetary Fund some 15 years or so ago
The Fund asked whether Bank whether it thought the exchange rate was too high, and what their exchange-rate modelling say about this?
- The reply of the Deputy Governor of the Reserve Bank of New Zealand was we don’t have exchange rate model because we don’t think there are any good. Gone are those days.
- The International Monetary Fund team was quite flabbergasted by this response.
At one stage the Fund team tried to draw me into the conversation about the level of New Zealand dollar because I was there representing the New Zealand Treasury. I was only attended as an observer, so naturally my response to their questions was to waffle incoherently. I could have been blunter and simply said the Reserve Bank of New Zealand spoke for New Zealand in this matter, but that would have been impolite.
I’ve been continuing to reflect on Graeme Wheeler’s repeated observation that New Zealand’s exchange rate “needs” to come down. I’m still not entirely sure what he means. The exchange rate is an asset price and presumably should reflect all expected future relevant information, not just spot information about current dairy prices. And the market has no particular reason to focus on stabilising the net international investment position at around current levels. Indeed, although it is a convenient reference point, neither does the Reserve Bank.
“Need” or not, I’d have thought it was likely that the exchange rate would fall further.
The ANZ Commodity Price Index, which lags behind (for example) falling GDT and futures dairy prices, has already had one of the larger falls in the history of the series.
Meanwhile, the fall in the exchange rate, while material, remains pretty small by the standards of past New Zealand adjustments…
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I don’t place much weight on criticisms of forecasting errors. If someone is any good at forecasting the economy, they would be fabulously rich through trading on their own account rather than working in a central bank.
The fact that Reserve Banks can’t forecast with any greater accuracy than anybody else is a bit of an indictment considering they have inside knowledge of the future course of monetary policy.
By the way, I wrote my masters sub thesis on official forecasting errors.
Plenty of commentaries have remarked on the very low inflation numbers out this morning.
None (that I have seen) has highlighted what a severe commentary these numbers are on the Reserve Bank’s conduct of monetary policy over the last few years.
Reciting the history in numbers gets a little repetitive, but:
• December 2009 was the last time the sectoral factor model measure of core inflation was at or above the target midpoint (2 per cent)
• Annual non-tradables inflation has been lower than at present only briefly, in 2001, when the inflation target itself was 0.5 percentage points lower than it is now.
• Non-tradables inflation is only as high as it is because of the large contribution being made by tobacco tax increases (which aren’t “inflation” in any meaningful sense).
• Even with the rebound in petrol prices, CPI inflation ex tobacco was -0.1 over the last year…
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