Matthew Hooton: Reserve Bank needs help from a Beehive return to orthodoxy


The Beehive says it has absolutely no intention of amending the Reserve Bank’s remit requiring it to keep average inflation between 1 and 3 per cent over the medium term, with a focus on keeping it near the 2 per cent midpoint.

Beehive strategists insist the Government has run an orthodox monetary and fiscal policy over its first four years, with the obvious exception of last year’s Covid response.

They say Prime Minister Jacinda Ardern and Finance Minister Grant Robertson are committed to maintaining that approach as the domestic and global economic outlook improves, and as rising vaccination rates around the world provide further economic impetus.

Just as the Beehive claims Ardern did with Covid, the best bet is that Reserve Bank governor Adrian Orr’s monetary policy committee willgo hard and early in stamping out anyinflation.

Now that the bank has stopped its large-scale asset purchase programme — bureaucratese for printing money — Orr’s committee has only conventional tools to control inflation, namely progressive increases to the official cash rate (OCR), the odd incantation to Tāne Mahuta aside.

ANZ and ASB both expect the first increase next month, although today’s June quarter inflation data will probably decide it.

If the Beehive’s commitment to orthodoxy can be relied upon, it is not devastating inflation we need fear but the highest interest rates since then-governor Alan Bollard battled the irrational exuberance of 2007.

The extraordinary success of the Reserve Bank Act 1989 in killing inflation means an entire generation — including Ardern — has never experienced how evil it is. To them, Don Brash is the elderly curmudgeon battling the rise of te reo rather than the heroic Reserve Bank Governor who banished rising prices.

Since Brash beat inflation in the early 1990s, it reached 4.6 per cent during the mid-90s economic boom, 4 per cent in mid 2006, and a touch over 5 per cent when the purse strings were opened after the global financial crisis and the Christchurchquakes. It has otherwise remained subdued.

This is a far cry from the horrors of December 1973 to September 1987 when it stayed in double digits every year, except for the brief period around Muldoon’s ultimately failed wage and price freeze.

The political risk is that somein the Beehive are tempted to think a bit of inflation is worth paying to keep interest rates and unemployment at their historic lows. After all, people losing their jobs is surely worse than everyone’s groceries going up a dollar or two a week.

More cynical political strategists will look at the electoral record and note the correlation between higher mortgage rates and voters chucking governments out. How could it hurt to raise the midpoint target from the current 2 per cent to, say, 3 or 4 per cent?

More dangerously, such reasoningmight gain support from academics and policy makers who suggest emulating the late 1940s and early 1950s and inflate away governments’ Covid-19 debts the way the real value of World War II debt was reduced. They ignore that inflation tells consumers to buy today rather than tomorrow, fuelling it further and making it so difficult to defeat.

The wiser heads in the Beehive — which in this case include Ardern and Robertson — understand that inflation is a tax on hard-working wage earners and savers, and a subsidy for indolent holders of assets and debt. For that reason, I’m all for it, but a Labour Government in particular shouldn’t be.

Ardern’s record on the issues she says motivate her — inequality and child poverty — is so far risible. The complete failure of her Government to stimulate housing supply, its need to print money and shovel it out the door last year to maintain consumer and business confidence, and ultra-low interest rates have already caused a massive transfer in wealth from renters and savers to homeowners and debt holders.

The latter may scream as floating mortgage rates rise from the twos towards the tens and house prices stagnate or fall, but those saving for a first home will get an automatic helping hand with higher deposit rates. The losers will inevitably screech louder in the media but Ardern needs to maintain her nerve that the overall effect will be to transfer wealth back to those she says she is in politics to help.

As always, New Zealand is mostly a policy-taker on much of this. How high interest rates need to go will depend largely on the extent to which central banks and treasuries in the likes of Beijing, Washington, Frankfurt and London decide they want to inflate away their Covid debts.

In Wellington, the Government talks a big game about supply chain and other microeconomic measures assisting the Reserve Bank in the new fight against inflation. But outside flooding the market with cheap labour — which is surely off the cards — there is little it can do.

The past two Governments have been laggards on microeconomic reform, the Commerce Commission is too slow and timid, and there is now no time to fix the duopolies and other inefficiencieslazily tolerated.

If monetary policy needs mates, the only one realistically available is fiscal constraint. Robertson is under political pressure to spend the unexpectedly higher tax take revealed this month but he would be much better to bank it.

That may be bad news for striking nurses and other unionised workforces waiting to demand their relativities be restored as soon as the nurses are successful. It should surely be bad news for those urging Robertson to fund new infrastructure projects like light rail whatever the cost.

It must certainly be the end of politicians using things like Shane Jones’ old Provincial Growth Fund, Stuart Nash’s new Regional Strategic Partnership Fund and Robertson’s own Covid Response and Recovery Fund to scratch political itches.

We are entering an era where whatever extra the Government opts to spend will mean even higher interest rates than already looming.

No one is arguing for austerity. But Robertson needs now to follow the Reserve Bank’s return to normality on monetary policy with a return to his more orthodox pre-Covid fiscal stance.

– Matthew Hooton is an Auckland-based public relations consultant.

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