The inflation policy target has been missed regularly over the past two years, and will be missed for another year. The evidence is that the target has been moved. So by who? And will we be let in on the secret?
About this time last year, there was an overwhelming clamour from market players that New Zealand's interest rates must go up. I admitted at the time I was perplexed as to why, but presumably wiser heads prevailed. And so up went our interest rates.
And I remain perplexed.
Having increased interest rates, we will get another statement early next month from the Reserve Bank of New Zealand (RBNZ) outlining their reasons why they will not reduce New Zealand’s Official Cash Rate (OCR). So, New Zealand will continue to have amongst the highest interest rates in the developed world and, consequently, an overvalued currency.
The RBNZ statement will also reiterate that the RBNZ believes the NZ$ is overvalued, but will then promptly propose to do nothing about it.
Their reasons for not reducing the OCR will likely revolve around New Zealand registering amongst the fastest GDP growth in the developed world, rising construction cost pressures as the Christchurch rebuild accelerates and further demand pressures from soaring migration inflows.
There will also be confirmation that the inflation target will continue to be missed through this year.
Note, in September 2012 the Minister of Finance and the Governor of the RBNZ signed a Policy Targets Agreement stating
“... the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint”.
The annual CPI inflation outcomes over the nine quarters since September 2012 have been 0.9, 0.9, 0.7, 1.4, 1.6, 1.5, 1.6, 1.0, and 0.8.
These outcomes, I submit, are not quite “... near the 2% target midpoint". Indeed, take the GST hike out of the picture and we get the image of highly over vigilant inflation police over the best part of the past 5 years. But that, perhaps, is a different story.
Unfortunately, it’s now going to get worse. Recently, in its January OCR review, the RB admitted that “Headline annual inflation is expected to be below the target band through 2015 ...”. Translation: not only are we currently missing the target, we will continue to miss it for the rest of the year. And, still, the RBNZ refuses to reduce the OCR.
The inflation policy target has been missed regularly in the past, and will be missed for another year. But the RB does not consider this a compelling case to reduce the OCR. One could argue that the case is even more compelling when noting that none of the nine outcomes since September 2012 can be said to be close to the stated focus of "... near the 2 per cent target midpoint".
So, if not now, what further evidence is required to shift the RBNZ's minds that the OCR should indeed come down to meet their inflation target? Note that even if we extract petrol prices from the above sequence of outcomes the numbers become 1.0, 0.9, 0.9, 1.2, 1.7, 1.6, 1.6, 1.2, and 1.0.
I can only conclude with that there hasn’t ever been a “... focus on keeping future average inflation near the 2 per cent target midpoint”.
In other words, the goal posts have been moved.
This begs the questions – who moved them and to where have they been moved?
Clarity from the RBNZ and the Finance Minister as to what precisely is the current policy target would be opportune.
Unless, of course, one prefers to continue the charade of market players second-guessing the central bank’s moves – and allowing those players to make hay in the process?