Thursday, 14 July 2016

Give the guy a break

Graeme Wheeler, the Reserve Bank governor, and the Reserve Bank more generally, have been copping quite a bit of criticism.

Shamubeel Eaqub's recent piece for Stuff, 'What makes a good Reserve Bank governor?', for example, noted that Wheeler and his predecessor Alan Bollard "are introverts – in an intensely public role", that hence or otherwise "The RBNZ's communication has diminished in quality over time. It is at a low ebb now", that there are central bank leaders overseas (he chooses Mark Carney at the Bank of England and Raghuram Rajan, formerly head of the Reserve Bank of India) who are doing a better job, and that the Bank and its people "are scarcely able to explain low inflation without leaning on failed models". He feels that when the next governor is picked in 2017, it should be from "a long list of strong candidates who possess the right skills for the job".

And it is not hard to find other critics. Hamish Rutherford, also in Stuff, had a piece, 'The Reserve Bank's job is not to keep people guessing', again focusing on communication, and concluding that Wheeler shouldn't be optimistic about getting the nod for a second term next year. And there are plenty of other mainstream and social media pieces along similar lines.

So let me put a few items on the positive side of the ledger. I've had a few goes at this in the recent past - 'Hold the rotten tomatoes', based on the Reserve Bank of Australia's recent experience, and 'Where are we? Where are we?' based on the RBNZ's - but as they self-evidently haven't made much of an impact on people's perceptions, let me try again.

First, it is indeed true (as Shamubeel says) that the RBNZ's forecasts of inflation and interest rates have been been too high, and for quite a while, and that the Bank hasn't been able to get low inflation back up to the middle of its target range.

But neither has any other developed economy's central bank. None of these gung-ho communicators - not Mark Carney, nor Janet Yellen, nor Yellen's predecessor Ben Bernanke, nor Mario Draghi at the European Central Bank, nor Haruhiko Kuroda at the Bank of Japan - has managed to get inflation up to their target levels, either. And other forecasters have similarly been systematically wrong: the Wall Street Journal, for example, does a monthly poll of a large panel of US forecasters, and they've been wrong for yonks as well. The consensus from the latest (June) poll, for example, thinks that the 10 year Treasury bond yield will be 2.2%: a year ago, the same panel of forecasters had picked 3.3%. That's a big miss by macroeconomic forecasting standards, and this in the most intensively analysed economy in the world.

So it should be obvious that the same thing happening in New Zealand can't be laid wholly or even mostly at Graeme Wheeler's door. And the reason comes down to those "failed models" that Shamubeel mentioned.

Between the end of World War Two and the mid to late 1970s, economists used to have a good working handle on how western economies worked. But it broke down when confronted with the stagflation of the Seventies, and was replaced by another workable model that lasted from the early 1980s through to the GFC and which brought us the 'Great Moderation' of that period - ongoing growth with low inflation. Now that model in turn has broken down, and the economics community globally is trying to build a new one, which is likely (among other things) to incorporate a greater role for credit and the financial sector, for globalisation, and for technological change.

But the economists are not there yet. No-one's got the new economy of 2016 sussed. And again it's obvious that Graham Wheeler isn't the cause of this ignorance, and that he's not alone in being blindsided by the structural changes of the past few decades. At least the Reserve Bank, as its Assistant Governor John McDermott said in a speech yesterday, is doing its bit to understand the new environment - "The Bank has shifted its resources in recent years towards more fully understanding this low inflation environment, and this is a strategic priority in the Bank’s 2016 Statement of Intent. The Bank has completed a range of research topics that have shed some light on the drivers of low inflation" - though to be honest I don't expect the big puzzles to be cracked here in New Zealand.

I'm not even convinced by the prevailing "poor communicators" argument.

For one thing, their communication does not seem to have done much damage to the Reserve Bank's credibility in the marketplace. I've looked up the inflation forecasts from the big four banks, and they have a shared degree of reasonable confidence that the Reserve Bank will have got inflation back around 2% next year. While ASB is least confident - they do "expect inflation to gradually return to the 2% mid-point", but they think not till 2018-19 - the other banks are on board with the RBNZ getting there or thereabouts next year. For inflation in 2017, the ANZ is picking 1.7%, the BNZ 2.4% and Westpac 2.1%.

There's little evidence from inflation expectations that the rest of the community has lost the faith, either. The RBNZ compiles an 'inflation expectations curve', which shows expected inflation at various time horizons, compiled from a range of different surveys. Here's the latest one, from the June Monetary Policy Statement. It leans towards ASB's view of the world, with a relatively slow 2-2½ timetable for inflation getting back to mid-target, but it gets there. And longer-term expectations are well anchored at close to 2%. There's not a lot of evidence there that the RBNZ is leaving people confused about the inflation outlook.

One of the communications gripes critics have, apparently, is that earlier this year the Bank said it wasn't likely to cut interest rates, but then unexpectedly did. The obvious answer to that is what Keynes is reputed to have said (but may not have): "Well when events change, I change my mind. What do you do?". Forward guidance - the (welcome) practice of central banks saying what they are likely to do, given what they know today - is just that: guidance. It's not graven in stone, and can't be.

As for communications style, I'd say that I don't know Graeme Wheeler's well at all: we might nod to each other if we passed on The Terrace, but that's about it. All I can observe is how he goes at the Monetary Policy Statements. He comes across as a bit more diffident than Don Brash or Alan Bollard (or my old mate Rod Carr, who got to make one monetary policy decision as acting governor), but perfectly competent. And for what it's worth I've quite liked the way he's taken a somewhat collegial approach to answering the media's questions, bringing in the likes of John McDermott or Grant Spencer.

As for being an 'introvert', again I don't know him well enough to be sure, but I strongly suspect that you don't get to be governor of any central bank by being a blushing violet. And I'm also left scratching my head over Shamubeel's description of Alan Bollard being one, too: this would be the shy and retiring Alan Bollard who's been head of the NZIER, head of the Commerce Commission, head of the Treasury, novelist, artist, and currently chief cat-herder at APEC? Think what he might have achieved if only he'd been an extrovert.

Me, I'd be careful about taking pot shots. If you are ever in a meeting and you start thinking to yourself, well I'm the smartest person in this room, then you'd better check very carefully that Alan Bollard isn't sitting behind you.

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