Latest / Best of Business / Michael Reddell: former Reserve Bank economist on the review into the RBNZ's Covid-19 response

Transcript

Michael Reddell: former Reserve Bank economist on the review into the RBNZ's Covid-19 response · Best of Business

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  Speaker 1: You're listening to a podcast from Newstalk ZB. Follow this
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  Speaker 2: Good afternoon. The Independent report into how well or how
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  Speaker 2: badly the Reserve Bank under Adrian Orr handled the COVID
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  Speaker 2: and post-COVID era has landed. It found the Reserve Bank
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  Speaker 2: was too slow to respond to rising inflation. Former Reserve
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  Speaker 2: Bank economist Michael Riddell is with us. Hi, Michael.
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  Speaker 3: Hi, Heather.
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  Speaker 2: Now, to be fair to Adrian Orr, the report says
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  Speaker 2: that the response started well. But at what point did
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  Speaker 2: it start to go wrong?
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  Speaker 3: I think it had probably gone wrong relatively quickly, but
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  Speaker 3: at very least by about Q3, third quarter of 2020,
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  Speaker 3: as they point out, the drop in GDP that occurred
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  Speaker 3: in the first lockdown was very sharp, but it rebounded
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  Speaker 3: very quickly. And there was a lot of evidence by
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  Speaker 3: the second half of 2020 that there was no reason
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  Speaker 3: at all for interest rates to be lower than they'd
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  Speaker 3: been at the start of the year. And with the
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  Speaker 3: government running big deficits, probably the case was pretty strong
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  Speaker 3: already for rates to be rising, not falling. And even
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  Speaker 3: when they eventually recognised the case for raising rates almost
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  Speaker 3: a year later, they were very, very sluggish. So, you know,
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  Speaker 3: right through for that 18 months or so from, say,
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  Speaker 3: September 2020.
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  Speaker 2: I mean, they're accused of basically ignoring the incoming data
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  Speaker 2: that was showing that interest rates, that inflation was rising,
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  Speaker 2: the economy was doing well, and instead focusing on forecasts.
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  Speaker 2: What's the explanation for them doing that?
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  Speaker 3: Well, I mean, inflation targeting is always what we think
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  Speaker 3: of as inflation forecast targeting. So you're always trying to
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  Speaker 3: look down the track and say, where will things be
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  Speaker 3: in 12 or 18 months from here? And I think
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  Speaker 3: the report does note that the bank recognised some of
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  Speaker 3: those incoming data, but they thought, well, it's likely there'll
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  Speaker 3: be another COVID outbreak, there'll be another lockdown, or some
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  Speaker 3: of these things are just temporary rebounds after lockdowns. So
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  Speaker 3: they had a model, a way of thinking about how
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  Speaker 3: the pandemic was going to play out in the economy.
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  Speaker 3: They just proved to be wrong and they discounted evidence
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  Speaker 3: that went against that story too readily. Now, what I'd
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  Speaker 3: say in their defence is that most private sector forecasters
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  Speaker 3: had quite similar forecasts to the bank. The difference, of course,
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  Speaker 3: is that the private sector forecasters weren't responsible for setting
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  Speaker 3: monetary policy. The Reserve Bank MPC was.
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  Speaker 2: Is the dual mandate part of the problem here?
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  Speaker 3: I don't actually think they make a compelling case on that.
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  Speaker 3: I mean, Adrian Orr always used to say that He
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  Speaker 3: thought it had never changed a single decision in his
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  Speaker 3: time there. The inquiry doesn't engage with that comment. It
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  Speaker 3: also doesn't look at whether, if it was so, whether
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  Speaker 3: our experience was worse than that of countries that kept
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  Speaker 3: single mandates. And so there's sort of an assertion there.
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  Speaker 3: The authors are people who don't like the dual mandate,
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  Speaker 3: but I don't think they make their case particularly compellingly.
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  Speaker 2: One of the recommendations is that they have better decisions
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  Speaker 2: under uncertainty. How do you ensure that?
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  Speaker 3: You can't ensure it, but some of the ways that
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  Speaker 3: they talk about are things actually that have been already
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  Speaker 3: done this year, is you make more individual accountability. So
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  Speaker 3: during this period, there was a strong emphasis on the
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  Speaker 3: MPC making decisions by consensus. That discourages rigorous independent debate,
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  Speaker 3: discourages anyone standing up and saying, hey, I think we've
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  Speaker 3: got it wrong. It might be a minority view, but
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  Speaker 3: it helps shift the ground. The Reserve Bank now is
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  Speaker 3: publishing individual members' votes. One of the other things they
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  Speaker 3: recommend is actually more resources, staff resources, be provided to
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  Speaker 3: MPC members. They have no analytical resources independently of management
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  Speaker 3: at all. That's quite unusual. If you go to the
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  Speaker 3: Bank of England or the Riksbank, for example, in Sweden,
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  Speaker 3: independent members have their own analytical resource so that they
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  Speaker 3: can push back on stuff that's coming from the governor
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  Speaker 3: and management.
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  Speaker 2: Excellent stuff, Michael. Thanks very much for running us through it.
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  Speaker 2: Michael Riddell, former Reserve Bank economist.
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