Playing the field

Questions that hadn’t been heard for the
past decade were raised in the first few weeks of the new year.
Who’s in charge of monetary policy management under the new government, and why is the Minister of Finance meddling?
They were raised by claque of commentators keen to uphold the principle of statutory independence for the Reserve Bank after Labour’s Michael Cullen mused publicly about the wisdom of the decision on January 19 to raise the official cash rate. The decision was taken fewer than two hours before the release of statistics showing inflationary pressures were all but unmeasurable in the December 1999 quarter.
According to the consumer price index, inflation increased meagre 0.2 percent during that quarter. Only few weeks previously, the Reserve Bank reckoned the increase would be 0.9 percent; the Treasury forecast rise of 0.8 percent.
Cullen issued press statement saying he would be raising with the Reserve Bank and Treasury Government’s concern at the inaccuracy of their inflation forecasts.
He also would be discussing with the bank the curiosity that it didn’t wait for the official CPI statistics to be released before making its move.
After all, the December result put the annual inflation rate at l.3 percent below the midpoint of the Reserve Bank’s price stability target zone.
Cullen recognised that the bank needed to anticipate future inflation, rather than just respond to past inflation; obviously judgement had to be made about the strength of future inflationary pressures, “and I accept absolutely that it is the bank which must make that judgement”.
But he would expect the Reserve Bank to monitor developments very carefully over the next few months, “and not necessarily assume pressures are there when the published figures are showing that they are not”.
None of these questions seemed calculated to frighten the horses or drive Reserve Bank governor Don Brash to resignation.
They might unnerve the money markets however, according to Cullen’s critics. By questioning Treasury’s and the bank’s competencies, Act’s Rodney Hide huffed, “Dr Cullen is in danger of spooking international investors that New Zealand may well have Minister of Finance prepared to meddle in things about which he has no understanding.”
Cullen had asked the right questions in the wrong forum, New Zealand Herald business editor Rod Oram contended. “This is no mere social gaffe. It is serious political misjudgment, damaging the credibility of New Zealand’s Government and economy.” By publicly challenging the bank’s decision to raise the benchmark interest rate, Cullen “is undermining confidence at home and abroad in the management of New Zealand’s economy”.
Oram’s concern was the maintenance of good government and economic management.
Ultimately of course, the elected government must be in charge of monetary policy. Ideally the administration of that policy should be open. It should also be robust enough to withstand scrutiny from any quarter.
If Cullen didn’t raise awkward questions about official forecasts, who would? Not too many money market analysts or commentators, we can be sure.
Their average forecast had been 0.7 percent, which means there was strong consensus among them that inflation annually was running at more than two percent and nearer to three percent in the December quarter.
Whether it was politic for Cullen to ask his questions publicly is another issue. After all, he does have proper private channels to the Reserve Bank and has the right to use them.
In fact, by expressing his concerns publicly he made it plain the governor’s independence remained intact.

Bob Edlin is Wellington-based economic commentator and journalist.

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