Monday, 29 February 2016

Is our monetary policy stance right?

Having indulged in a little flight of fancy in my previous post about a stonking easing of monetary policy, it's time to get realistic again. So here's my latest occasional update to the actual stance of monetary policy - that old warhorse, the Monetary Conditions Index (the 'MCI'), which combines the level of interest rates and the level of the NZ$ into an overall measure (based on the RBNZ's monthly figures up to January, and current market levels for February).

Turns out, the flight of fancy may not have been so fanciful after all. Monetary policy, on this measure, is slightly on the tight side of average, and that doesn't seem to make a lot of sense at the moment: it's meant to be "accommodative" (as the RBNZ put it in the latest review of the Official Cash Rate). Unless as a central bank you're very confident in your call that everything's hunky-dory over a medium-term perspective, and that inflation will get back to around 2% on present monetary policy settings, you'd think the lesson from this graph is that policy should be starting to ease.

Which is also where the ANZ Bank has got to in their latest Market Focus, where they now think the RBNZ will cut the OCR by 0.5% this year (the publication isn't up on the ANZ website yet, but have a commentary and a link to the publication itself). Interestingly, ANZ have their own 'financial conditions index', which is a different way of assessing the overall policy picture and which includes house prices, credit spreads and the NZ$: it's saying the same thing as the old MCI, namely that conditions have tightened recently. However you get there, the analysis is pointing towards the need for a lower OCR.

Friday, 26 February 2016

A modest proposal

The Reserve Bank has been taking some stick recently about not getting inflation up to 2% - you have your choice of posts on Michael Reddell's blog, for example - and yesterday Stuff's Vernon Small weighed in with 'Monetary policy is bust, so why are we still banking on it?'

So here's a modest proposal to get us back on track.

First, we cut the Official Cash Rate to 2%, the same level as the Australian policy rate. Nice big demonstration effect right there, with a 0.5% move instead of the usual 0.25%, plus it would be a genuine surprise (the futures market has only one 0.25% cut in the pipeline).

Second, we signal we'll match any future cuts in the Aussie rate (the futures market figures the RBA will cut by 0.25%, some forecasters think there are two cuts on the way).

Third, we do some quantitative easing (QE). The RBNZ buys enough government stock to drive down our current 10-year yield (3.04%) to the level of its Aussie equivalent (2.40%). It would help if Treasury cancelled its scheduled bond tenders and instead placed Treasury bills direct with the RB.

At that point, no sensible investors will pick New Zealand over Australia (the Aussies have a slightly better credit rating, so if the interest rates are the same, you'd pick them). Investors in New Zealand will clear off, and the currency will depreciate. It wouldn't hurt to give it a judicious nudge with some thin-market currency intervention.

If that doesn't get us nearer 2%, well maybe Vernon's right, and nothing ever will, but we'll never know unless we give it a go.

Course, the Auckland housing market will have turned incandescent, but you can't have everything, can you?

More seriously, I can't help feeling that it's theoretically possible, in the current collapsing-commodity, competitive-devaluation, out-QE-the-other-guy world, that there may be no feasible or desirable setting of local monetary policy that is consistent with 2% local inflation.

I've had a go in the past at trying to put this into some kind of formal framework (if you don't mind some simple graphs). My conclusion back then was that, if there was overseas monetary policy loosening (and a great deal more has happened since I wrote in 2013), and the RBNZ wanted looser policy but would prefer if it didn't exacerbate the housing market, then something had to give:
the Bank's got a bit of leeway: it doesn't have to keep inflation strictly at 2%. It's got a band of 1% to 3% to work with (on average aiming at a longer term average of 2%). Where the logic of things leads you to, though, is this: in current markets, the Bank will need to use this leeway, and let inflation undershoot 2% for some time.
It's possible that the sub-2% undershoot that we have indeed experienced isn't such a bad result, in the round. It could be the best we could realistically achieve in current world market conditions - or at least the best we could achieve short of having slavering buyers stampeding from auction to auction to snap up the last house under $3 million.

Wednesday, 24 February 2016

Sovereign irresponsibility

There was a fine article by Deborah Hart, the executive director of the Arbitrators' and Mediators' Institute of New Zealand, in Monday's Herald, making the sensible case that the supposedly controversial 'Investor State Dispute Settlement' (ISDS) process within the Trans Pacific Partnership (TPP) is actually a good idea. Read it for yourself: the gist is that ISDS "will work well for NZ" and that "Investor-state dispute settlement is therefore not something to be afraid of. It's part of being a trading nation in a globalised world".

What's baffled me most about the strong opposition to ISDS is the notion that "national sovereignty" is something that is sacrosanct, not to be jeopardised, diminished or traded away. If national sovereignty really trumps everything else, Dachau would still be open, apartheid flourishing, and every Tutsi in Rwanda and every Muslim in Serbia would be dead.

Progressives everywhere ought to welcome international controls on appalling behaviour by "sovereigns" - a useful crutch for the world's kleptocratic tyrants to lean on - as they have since (at least) the founding of the League of Nations in the wake of another fine exercise of national sovereignties, the Great War.

What "sovereigns" are demonstrating when they resist principles-based restraints - when, for example, neither China nor the US will participate in the International Criminal Court - is that they prefer the option of unprincipled behaviour. When countries sign up to the likes of the ICC, or to the ISDS provisions in the TPP, they're saying the opposite: we'll play fair, and we don't mind being judged on it. That's exactly where New Zealand should be.

Thursday, 11 February 2016

No appeal? Good

I've been catching up with stuff that's happened over the summer holidays, and I have to say I was quite encouraged when I found out that Chorus has decided not to appeal against the Commerce Commission's decisions on copper broadband pricing and on backdating the regulated price.

Chorus's statement on January 28 said that "the Chorus Board has elected not to appeal the decision, despite disagreeing with some key elements such as the lack of backdating. While we are aware that some investors feel there may be merit in further testing aspects of the determination in court, it is the strong view of the Board and Management that the best long-term value for our shareholders and customers will be achieved through the industry focussing on bringing New Zealand better broadband".

Well said. Even if there is also something of a Mexican standoff going on - "we won't appeal against some aspects of the decisions if everyone else holds off, too" (my words, not theirs) - the general idea is bang on the button. There has been a deal of opportunistic regulatory and litigatory rent-seeking in the telco, and other, sectors over the years, and it is good to see someone turning their back on it and getting on with running the whelk stall.

More companies could usefully realise the true extent to which regulation and litigation are a distraction from their core lines of business. The direct costs of management and board time, and of lawyers and economic experts, are only a fraction of the true cost of diversion of focus from longer-term performance. In my experience, across various governance roles, that item on the agenda about the regulator or the court case takes on an entirely disproportionate importance. The corporate ego gets overinvested in winning: business strategy and longer-term performance are the inevitable losers.

Chorus may well have come to another correct conclusion that others could learn from: if you play the regulatory game too hard for too long, it will bite you (as I've argued before). We might eventually have had sector-specific regulation in any event, but there's little doubt that Telecom (as was), and various parties in the electricity business, pulled their current sectoral regulatory regimes onto their own heads through their bloodyminded intransigence.

I'm perfectly happy to accept that focussing on the business was the primary motivation for Chorus flagging away any appeals.  But if in the background Chorus also reasoned that pushing their luck on backdating - they might have scooped a pot of some $140 million - on top of a halfway decent outcome on the price, would have been a bad strategic move, given that the whole regime of telco regulation is currently under review, then they made a good call.