Back in March, this column mused on the critique of one Antony Mueller, Brazilian economics professor who reckons modern economies are too complex and diverse for central bank control of money supply and interest rates. Among the problems, he contended, there is rapid deterioration in the informational quality of statistics used by central banks – gross domestic product, the inflation rate, productivity growth, or the many other economic indicators that are popular nowadays with central bankers and the financial press.
Mueller, essentially, was saying central bank bosses like our own Alan Bollard can not know for sure how monetary impulses affect economic activity, to what degree those impulses affect consumer prices or how they will modify investment or impact on asset prices. The data are historical and provide no certainty about how the transmission mechanism will work in the future.
Bollard would be studying the statistics, nevertheless, this column said. Then he would use them to make judgements about whether the official cash rate should be lifted, lowered or kept where it is, and whatever he decided, there would be raft of consequences.
In the upshot, he decided to raise the official cash rate for the first time in more than year to 7.5 percent. Just how assiduously he had studied the statistics was open to question. He expressed concerns about an economy that was growing too fast with unemployment too low. And so he must slow things down.
Yet the economy had been going through period of slowdown and only now was starting to pick up again.
Bollard more particularly was concerned with housing prices and the pace of activity in the housing sector, even though this is just one sector of the economy which – critics of monetary policy management were bound to point out – should not overshadow the needs of the other sectors. Especially the export sector.
The governor’s press statement made no mention of the export sector, other than to note that the recent lift in export commodity prices – particularly dairy – may be factor in increasing domestic demand. This is worrisome, raising questions about the economic tensions that are created when one policy instrument – the OCR – is used to solve more than one problem.
Some economists want Bollard to go back to his policy agreement and take note of the policy target: it requires the overall level of prices, as measured by the consumer price index, to be kept between one percent to three percent on average over the medium term.
The Reserve Bank’s own forecasts showed CPI inflation to be well within the one percent to three percent band over the next few years. Other forecasts – including those of the bank economists who were clamouring early in March for an increase in interest rates – likewise were between one percent and three percent.
So it was hard to see the need or the justification for the March rate rise, let alone for warnings of further rise.
If there are concerns with the housing market, then someone other than the Reserve Bank should address them. Let’s leave the OCR and monetary policy to deal with overall inflationary pressure, if there is any. Deciding who should tackle housing and how they should do the tackling is Treasury job, because the housing market is critically intertwined with wider economic issues – it has plenty to do with savings behaviour and the business profitability that encourages investment in property rather than shares, which links it to KiwiSaver, the so-called Cullen fund and so on.
The remedies are highly unpalatable. The idea of levy on fixed interest rates, for example (proposed, then quickly discarded by Finance Minister Michael Cullen in February). Or changes to the tax treatment of rental properties. Or capital gains tax.
But if the Government is serious about addressing its concerns about the housing market, unpalatable policies – and political unpopularity – can’t be avoided. Facing up to that reality is smarter than putting those concerns in the too-hard basket and trying to clobber the housing market (with spectacular lack of success so far) with the OCR.
The reason to worry much more about the export sector, on the other hand, rather than sacrifice it to try to keep the housing market in check, is that exporting is the economy’s wealth and employment generator. If the Government is serious about getting New Zealand further up the OECD ladder, it must shake off its fixation with housing and pay much greater attention to the problems of exporters – especially (let’s face it) in Export Year.
Bob Edlin is regular contributor to Management.
