Friday, 5 August 2016

We are not alone

Although we are heavily intertwined with the global economy, us New Zealanders are not terribly good at living with its corollary: while we like gotcha! blame-finding of local bigwigs, the reality is that a lot of what happens here has precious little to do with anything we've done (or neglected to do), and has a great deal more to do with the great sweep of world affairs. Even our surging house prices (as I argued yesterday) have a substantial international context to them.

Along those lines, I've had a go recently at suggesting (in 'Give the guy a break') that we should cut our Reserve Bank governor some slack. Yes, inflation is still below target. Yes, forecast inflation has been too high. Yes, the Bank raised interest rates in 2014 and (with hindsight) probably shouldn't have. But none of this is at all unique to New Zealand. It's not all, or mostly, or even a fair bit, down to Graeme Wheeler and the team at No 2 The Terrace.

What got me thinking about it again was today's Statement on Monetary Policy from the Reserve Bank of Australia. Here's one graph from it that's worth poring over. It shows that we are in the same boat as the rest of the world: with few exceptions (certainly in the developed world), inflation everywhere is lower now than it used to be, and lower than central banks would like it to be (Australia ditto). Local missteps or inaccuracies can't be any big part of the story.

Here's another, showing how the US Fed - arguably the most sophisticated central bank in the world - has been wrong-footed by this unexpectedly low inflation: again, it's not just us. Earlier this year the Fed thought that it would be marching the Fed funds rate smartly up to 3% by late 2018 ('FOMC' in the graph is the Federal Open Market Committee, the Fed's policy-setting group). Now it thinks it'll be more like 2.4%, and chances are that 2.4% is still miles too high: the financial markets' expectations are for sub 1%. The financial markets themselves have also been forced to have a rethink.

Just as ours have. Here's the comparison between the March and June consensus forecasts for our 90 day bank bill rate (from the NZIER's latest consensus poll). You can see (near the bottom) the expected track has been revised down by 0.5%, which is a large change for a single quarter.

Of course we should avoid making any egregious errors of our own. And of course we should aim to do a bit better than the international average. But when things appear to have gone off the economic rails and we're tempted to bag someone for it, it will often be a good idea to take a deep breath and check whether we're wrestling with the same issues as everyone else.

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