The Reserve Bank governor has been jumping around on just when he intends to start raising interest rates. For a man who has people's homes in his hands, surely he has to mean what he says and say only what he means
I've got a bottle of wine riding on what Reserve Bank governor Alan Bollard does with the OCR next year; for a lot of New Zealanders it's their homes hanging on his decisions.
About a month ago, I was talking to a business journalist friend who said the market had decided that Bollard would jack up the Official Cash Rate early next year; it was a given. This was not long after October 29, when the governor had kept the OCR unchanged at 2.5 percent, saying he would maintain it at its current level until the third or fourth quarter next year. To be precise, he said:
“In contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010.”
Earlier in the year he had announced he had every intention of keeping the OCR "at or below the current level through until the latter part of 2010".
Now both of those statements can be seen as a signal to banks not to start raising interest rates pre-emptively. Chillax, he was saying to the money men. I'm not moving my rate until after June next year, so you don't have to move yours. You can bank on that, you might say.
As someone who's reasonably, yet only moderately, knowledgeable of things financial, I took him at his word. We have set our mortgage and timed our house sale accordingly. I mean, if you can't trust the word of the Reserve Bank governor, a most august and serious man indeed, then who can you trust? So while I've read the stories saying the money folk are skeptical, I was surprised my business journo pal wasn't so much querying Bollard's commitment as certain he will raise the OCR in the first quarter.
Her message was that, regardless of Bollard's decisive signal to banks about his confidence, they're confidently ignoring him, deciding that he's already decided something contrary to what he says he's decided. Clear?
Then, last week, Bollard made his final OCR announcement for the year. His timeline, it seems, has changed somewhat. He said:
“If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010. Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the OCR and bank funding costs, reduces the need for more immediate action.”
Late 2010 has become mid 2010. Could that become early 2010 in the new year? Am I going to have to find some extra cash for a bottle of wine as well as bigger mortgage payments? Are the Reserve Bank's words worth the currency they're written on?
I had dinner with a bank manager this week, and he just laughed and said, "of course" Bollard will flip-flop. The market has decided he will move in Q1, no doubt, and it will keep rising after that. Just wait and see, he said.
I still have hopes that I'm right regardless of the experts, and that I can trust Bollard to stick to his word. Because in all seriousness, the confidence of our monetary policy rests on his words, and if his intentions and pledges can swing from this quarter to some other quarter in six weeks, what does that say about the credibility of our Reserve Bank and the quality of its analysis?
Sure, he as to be able to react to a changing environment, and I hardly have to be called Stiglitz, Stern or Krugman to know that inflation is a coming global problem within the next two years. All that stimulus has to hit prices eventually. But we can all see that coming; there's no need for sudden shifts.
Bollard also has to take responsibility for his words, and the fact that, unlike people who live in the market every day, ordinary New Zealand households expect to be able to take them at face value. We're often criticised for our lack of financial literacy in this country, but if even the governor is talking in riddles, what chance do we have of feeling secure in this market?
David Lange famously said, more or less, that any child growing up in this country nowadays who aspires to real power should want to be Reserve Bank governor, not Prime Minister, and as such we should be able to bet our homes on his words. Indeed, many have. We have $600 billion tied up in housing in this country; around $200 billion in rental properties. It's not something to be proud of, but it matters. This is major league hip-pocket power.
If the governor has the influence of the PM, then the governor's OCR statements should carry the authority of an election promise. If he says he expects to make a change at a certain time, he should do so. If he isn't certain what he'll do, he should say as much. These are people's homes he's playing with.
So Dr Bollard, please be more precise next time you start talking about your future decisions. Leaping from late next year to mid next year is frankly irresponsible and could end up costing thousands to people who make housing decisions based on your authority. What's more, it could cost me a bottle of wine.