In this morning's email we dig into the detail of Acting Reserve Bank Governor Grant Spencer's first MPS and press conference and what it might mean for new Finance Minister Grant Robertson's reform plans.
1. Governors wary of Robertson's plans
We got our first chance yesterday to grill Acting Reserve Bank Governor Grant Spencer and his deputy Geoff Bascand about the new Government's proposed changes to the Reserve Bank's single mandate to keep inflation low and to having external decision makers on a monetary policy committee.
Neither Spencer, who is retiring on March 26, and Bascand, who is thought to be a top candidate to replace him, were enthusiastic about the changes at their news conference after the release of the bank's quarterly Monetary Policy Statement.
They argued the inclusion of maximising employment alongside keeping inflation low would change little in how the Reserve Bank operates, and the move to having external decision makers on monetary policy risked turning into a "bit of a circus" if those external voters talked publicly and created confusion.
Finance Minister Grant Robertson has a task on his hands to change the culture of the bank if an internal candidate or a 'business-as-usual' bureaucrat is recommended for Governor by the board.
He faces an ugly choice to either reject such a candidate and risk a fight with a National-appointed board, or he may have to rush through a change in the Act to give the Finance Minister the power to directly appoint the Governor, as is the case in other countries. Either option would make the new Government look like it was bullying an independent institution and messing with one of the core foundations of the economy.
The board's recommendation and Robertson's subsequent choice are shaping up as key moments early in the new Government, alongside whether to accept a TPP with unpalatable conditions on Investor State Dispute Settlement (ISDS). We have more on that lower down.
2. 'There's low, and then there's too low'
One focus for the questions for Spencer and Bascand was Robertson's target of getting unemployment below four percent, which is where it got to in the previous Labour Government.
Spencer said the labour market was already well balanced or in equilibrium with unemployment at 4.6 percent, and that unemployment below four percent was likely to heat up inflation too much with the current structure of the economy.
Robertson has not specified that four percent should be written into any Policy Targets Agreement, but the issue highlights the potential tension between a Finance Minister who wants to lower unemployment and raise wages, and a central bank that believes the economy is already at full employment and further stimulus would force inflation and interest rates higher.
This debate over where full employment is and whether the Reserve Bank needs to run looser monetary policy to achieve it is a test of any appetite for change.
The Reserve Bank and Treasury refer to this 'equilibrium' level as the NAIRU, which is the non-accelerating inflation rate of unemployment. This is also often described as full employment, beyond which the economy starts to 'rev too fast' and generate wage and other inflation.
Treasury has estimated the NAIRU in New Zealand at 4.25 percent, while the Reserve Bank has said the level is unobservable, but Spencer said it was somewhere between four percent and five percent at the moment.
Spencer said the Government would no doubt try to improve labour market practices and other structural elements in the economy to try to lower the level of full employment below four percent.
He said a dual mandate that included maximising employment would not change the Reserve Bank's policy-making that much, given it already used flexible inflation targeting that aimed to run the economy at full capacity anyway. That flexibility already left open the option of letting inflation run above the three percent top of its one to three percent target band to promote stability in output, employment or foreign exchange rate markets.
"I would say, and this is something shared by my colleagues, is that moving to a dual mandate is unlikely to have a major impact on the way that we run monetary policy," Spencer said.
"For example, sometimes we're happy to see inflation move outside of our target band in order to promote the stability of output, employment and the exchange rate, and this is a requirement in our policy targets agreement," he said.
"With a dual mandate, it may mean that our approach becomes more flexible in the sense of allowing greater volatility in inflation in order to promote more stability in employment, for example. There may well be situations where a dual mandate may shift our approach, particularly if the labour market was a long way from equilibrium.
"But in the current situation, I would say that the labour market is pretty balanced, and therefore I don't think a dual mandate, if we had it right now, would make much difference at all to our current policy stance."
Asked if he thought accelerating the economy to push unemployment below four percent would be inflationary, Spencer said it would without structural change.
"The estimates of full employment or the NAIRU are quite uncertain and we're doing work on this, particularly if we're moving to dual mandate, we need to do a lot of work on this on pinning down some of these numbers. Presently estimates of natural rate of unemployment vary between four and five percent.
"The Government is saying they would like to see unemployment below four percent. That's a very worthy objective of course, but in part that reflects attempts to use structural policy to reduce the equilibrium rate of unemployment, not just the actual rate of unemployment.
"Monetary policy can't affect the equilibrium rate of unemployment. We can have short term influence through the cycle. But if you want to get the equilibrium rate down on a sustained basis then the Government will need to work with various policies such as education etc. That makes a lot of sense, but this is something the minister has said. He's not saying he's expecting monetary policy to achieve a sustained lower rate of unemployment, say below four percent."
"If the equilibrium or NAIRU was between four and five, then the further you get down below that, then that would tend to be inflationary, unless you can bring in other policies to get the equilibrium to a lower level."
Robertson was asked to respond to Spencer's reluctance to try to use monetary policy to push unemployment below four percent.
"Four percent is our initial target in this term. I think the way we can move below that is by making some pretty significant policy and structural changes. For example a heavy investment in education and skills would start to lift our productivity, and I believe at that point we can go below four percent, but our initial target is four," Robertson told reporters in Parliament.
Spencer also cautioned about the inflationary effects of big new pay equity wage deals, similar to the $2 billion deal done earlier this year for aged care providers.
"That is a potential risk, yes," Spencer said about the potential inflationary effects of further pay equity deals, beyond the 0.2 percent increase in annual wage inflation forecast from the new Government's $20/hour minimum wage policy by 2020.
3. 'We want to avoid a bit of a circus'
Spencer and Bascand were also sceptical about the proposal in the review of the Act announced this week for external members on a monetary policy making committee.
They said there was a risk that an external member would talk in public and have distinct views different from the Reserve Bank, creating confusion. There may also be problems finding qualified people who weren't conflicted, they said.
"We certainly agree that the Act should be changed to operate with a committee, because we already act with a committee, and so we would like the Act to reflect that,"
He said there were pros and cons of having external members on that committee, with the benefits being more diversity in the decision making.
"But there's potential issues in a small country with finding the appropriate expertise that is not conflicted and is politically independent -- making it work is a tricky issue.
"We see a more important issue is that a committee has a collective responsibility, rather than having an individualistic committee. Sometimes you see policy committees in other central banks where everyone is out in different views in public and it turns into a bit of a circus, and that's the thing that we're more concerned about avoiding that.
"Sure get diversity and different views and publish minutes, whatever, but have collectively responsibility rather than having everyone heading in different directions.
"We think the internal committee works pretty well, so if it's got to be changed, we want to improve it, not worsen it."
The internal committee, which is a bank practice rather than being specified by the Act, includes the three Governors pictured above.
Spencer referred to other central banks where internal and external members were regularly giving speeches which was commented on.
"It also potentially undermines the reputation and the credibility of the institution," Spencer said.
He gave the example of cabinet decisions where the individuals could have a 'scrap' inside cabinet and then have collective responsibility outside cabinet and speak with one voice.
Bascand said having external members brought undue focus to the personal views of policy makers, rather than issues involved.
"You can get personality dimensions where the individuals are the focus. Are they a 'dove' or a 'hawk', as opposed to what are the issues that the bank was considering, in terms the risks around household spending and the labour market," he said.
"We'd rather have that focus on the substance of it."
I spoke with Bascand at more length later in the day and will have more detail in a specific article to be published on Pro later today.
I later asked Grant Robertson about external members speaking publicly with conflicting views to the bank.
"We were aware as we developed this policy that we also don't want any members of the committee selling their wares on the basis of being a member of a committee," he said.
"We would expect them to take those responsibilities seriously, but we think the value in having outside perspectives is critical to making sure the bank is able to make the best possible decisions. The reason we're having a review is to make sure we identify the best way of implementing this policy.
"I've got no desire to see people going out and speaking out of turn."
4. LVRs under review for relaxation
Meanwhile, Grant Spencer gave the Bank's strongest hints yet that it is considering a gradual relaxation of the Loan to Value Restrictions (LVRs) now the housing market has slowed down.
We should get more news on that on November 29 with the release of the half yearly Financial Stability Report (FSR).
"We're certainly reviewing the LVR restrictions and the criteria that we would adopt for their removal and we'll be saying more about that at our FSR in a couple of weeks," Spencer said when asked if the LVRs would be relaxed and if a Debt to Income multiple tool might be adopted.
"We've had a consultation on the DTIs and there were a few issues that were raised in that consultation about how we would make that policy work. We still think it makes sense to have some sort of debt service tool in the macro-prudential tool kit, but at this stage we're planning to wind in that issue into the Macro-Prudential review which we're conducting with Treasury over the coming several months.
"Given the conditions in the housing market, we're not looking to introduce any macro-prudential tools, but from a long term point of view it still makes sense have an instrument of that sort and we'll be considering it in the review.
"When we introduced them we certainly said these were a temporary measure and at some point we would look to remove them, but if we're looking to remove them that wouldn't be done in one hit. It would be a gradual, more cautious approach."
He said it was unlikely that the LVRs would be replaced by a DTI tool.
Robertson was later asked if he wanted the LVRs relaxed.
"We've always had the view that LVRS were a somewhat blunt instrument. They'll take their decision on that as they're entitled to," he said.
5. Still low for a very long time
Meanwhile, aside from all the talk about changes to the Act, the Reserve Bank also made a monetary policy decision and published a full Monetary Policy Statement.
The Reserve Bank held the Official Cash Rate as expected at 1.75 percent. It also moved forward its expected first rate hike by three months to mid-2019 from late 2019, although it only lifted its forecast track by 10 basis points.
The bank lifted its headline inflation forecasts over the next year, in part because of a recent fall in the New Zealand dollar.
Elsewhere, it estimated the Government's new policies would generate an economic stimulus equivalent to 0.5 percent of GDP, and that its plan to increase the minimum wage to $20/hour by 2020 would lift annual wage inflation by 0.2 percentage points per annum over the next three years.
The fiscal stimulus offset the effects of a slightly slower domestic non-government economy because of a slowdown in the housing market.
Spencer also expressed comfort with the New Zealand dollar's level at 69 USc, saying the five percent fall in the currency since August took it down into the vicinity of fair value.
The comments were much less aggressive about the currency being too high than the previous Governor Wheeler had made when the currency was above 70 USc.
6. A big day for the TPP
Newsroom's Sam Sachdeva reported from the Apec meeting in Da Nang in Vietnam this morning that Jacinda Ardern said last-minute negotiations over the fate of the Trans Pacific Partnership trade deal were going “down to the wire."
See Sam's full story here on Newsroom Pro, where it was published first earlier this morning.
Trade Minister David Parker was talking with ministers from the 10 other TPP countries through the night, in the hope that leaders could sign off on a deal on Friday evening (NZT) at the Apec summit.
Elsewhere, Sam looked at the wider strategic picture as Donald Trump tries to pivot to a new 'Indo-Pacific' stance that may revive the 'Quad' alliance of Japan, India, America and Australia.
In this analysis first published on Newsroom Pro, Sam assessed the risks for New Zealand as it tries to walk a fine line between America and our largest trading partner, China.
Elsewhere, Sam reported Ardern is being accompanied at Apec by Foreign Affairs Minister Winston Peters, who arrived earlier in the week for ministerial talks.
Peters confirmed he had met with ministers from a range of countries, including Japan, Vietnam, Thailand, and Australia.
“We’ve had some very substantial talks and very valuable - a good chance to catch up with people I’ve known for a long time.”
Of greatest interest was his meeting with Russian Foreign Minister Sergey Lavrov; the inclusion in the Labour-New Zealand First coalition agreement of a pledge to “work towards” an FTA with Russia has attracted concern in some quarters, including from the EU’s New Zealand ambassador Bernard Savage according to the NZ Herald.
Peters confirmed the pair had met, but said the FTA was not discussed - although he hinted at a warming of relations between the two countries.
“I talked about the bigger picture of where do we go in the future, that was the past and we as a country are seriously interested in going back to our serious relationships in Antarctica and other areas, where we can be of enormous help to each other.
“He was delighted to hear it and suggested we get back together with our officials as soon as possible.”
Poisoning middle earth?
Peters found himself in the spotlight for less desirable reasons, with an opinion piece in the Washington Post from New Zealand-based writer Ben Mack suggesting his party was “a shadow...poisoning Middle-Earth”.
“For all the excitement around Prime Minister Jacinda Ardern and her new government, the real power lies with the far right. And, more terrifying: The far right seized power by exploiting the very system meant to be a fairer version of democracy…
“Like American white supremacists in the age of Trump, bigots in New Zealand have also been emboldened by New Zealand First’s success into taking action beyond ranting on Internet message boards and social media.”
Ardern defended her Deputy Prime Minister, saying: “I’d suggest that the Washington Post probably hasn’t interviewed anyone from New Zealand First, or potentially even a voter, before making those assumptions - I just reject that.”
As she prepared to take another question, Peters wanted the last word.
“Can I just say, I’m writing to the Washington Post to suggest that someone’s escaped from a lunatic asylum about 2.30 in the morning and writing in article in the name of that person, because no sound, sane person could have written that malicious, totally false statement.”
However, the pair were less forthcoming on why Peters is taking legal action against a range of National MPs, staffers and journalists. Peters claimed he could not comment as the matter was sub judice, while Ardern said it was a personal issue for him to deal with..
7. Rod Oram challenges Twyford's RUB plan
In this week's column for Newsroom Pro, Rod Oram challenges the new Government's plan to remove the rural urban boundary (RUB) around Auckland.
He argues that removing the RUB would be a distraction from the hard work of making the existing Unitary Plan work, and ignores the extra costs of urban sprawl.
8. Two fun things
Gareth Morgan doubled down overnight with his comments in the wake of the death of Paddles: "Does anyone think the PM's not a hypocrite having taxpayers fund conservation while her cat wanders & kills at will?"
Toby Manhire in response: "Dead cat flounce."
Shane Jones is a pleasure to have back in Parliament, with his occasional one-liners, including this one while pointing at Steven Joyce and asking Trevor Mallard to shut him up: "Mr Speaker can you tell Slim Shady with the bald head to keep quiet?"