Gareth Morgan, Director of Gareth Morgan Investments
The recent retort from Bancorp that criticism of the RB’s tightening of monetary policy is unwarranted, really is wide of the mark. Few that have queried the Bank’s policy this year have questioned whether they should have or shouldn’t have tightened policy. At issue has been the manner in which they have actually conducted policy – whether for example giving such prominence to a fixed exchange rate target is the most appropriate way for the Bank to delineate between tight, loose, or appropriate monetary conditions. Behind this debate lie issues of policy communication and academic issues of whether the particular model of the inflationary process which the Bank is using is correct. It’s a model empirically validated upon historical data which may well not reflect the influences currently appropriate to inflation determination, and is a model which pays small heed to demand influences. Indeed the Bank’s own recent research has suggested that the role of demand factors is perhaps more significant now than models formulated upon historical NZ data would lend credence to.
All of this pretty important debate is half a paddock away from the bald assertion by Bancorp that the RB should have tightened monetary policy because of the dangers of inflation being rekindled. Bancorp’s interpreting the criticism of the RB as synonymous with a view that monetary policy shouldn’t be tightened is wrong. Indeed it’s curious they should misconstrue the debate in that way. One’s left wondering why Bancorp would choose to label the protagonists in RB criticism as necessarily low interest rate fans.
One could argue the National Bank has a vested interest in the recent rise in interest rates being only a temporary phenomena since they’ve taken a very prominent public position over their view that the mortgage rate rises have been a panic reaction by their competitors, maintaining their lower lending rates and inviting borrowers in while the window is open. If they’re wrong it will cost them. Conversely the Bancorp criticism of those opposing the implementation of monetary policy – which I presume is aimed at the National Bank who released their criticism days earlier- may be a similarly expressed statement of vested interest, in this case setting up a straw man, in the form of (mischievously) labelling the National Bank criticism of the RB simply a disguised low interest rate view, so Bancorp can whip up support for tighter monetary policy. After all it was Bancorp who less than a year ago was very public with their view that the NZ dollar could only go one way now and that was up – talking about a 7% rise in the currency being in prospect. That forecast has of course been horribly wrong to the detriment of those exporters interpreting the view as advice and hedging receipts in anticipation. Any tightening of monetary policy which may “rescue” such a strong currency view may be commercially welcome by Bancorp.
All of the above highlights the murk generated when participants in financial markets also proffer “objective” analysis of market trends to the public.