The Most Selfish of Self-Interests

Politicians Know Best

One of the great advances in governance in New Zealand has been the Reserve Bank Act (1989).  Prior to that time the Reserve Bank operated as a personal fiefdom of the Prime Minister.  Consequently monetary policy before 1989 was under the influence, if not outright control, of the most powerful politician in the land. 

The Reserve Bank Act made the Governor of the RB, appointed by the government of the day, independent of any political masters.  He (and the Bank) were responsible to the law--to carry out the Reserve Bank Act.  One of the key advances of that Act was to make controlling inflation the number one duty of the Bank when it came to monetary policy settings.  In effect, this created a check and balance upon the venality of politicians.  Virtually every Prime Minister (and Minister of Finance) since the passing of the Act has complained about the settings of monetary policy and has lectured and hectored the incumbent Reserve Bank governor.


To a man all of the politicians' criticisms were about monetary policy being too strict--therefore, they were all attempting to pressure the Reserve Bank to allow more inflation in the economy.  Why?  Well, inflation--at least in the its early stages--gives the appearance of economic growth and prosperity.  That makes voters more happy with the government-of-the-day.  In criticizing and pressuring the Bank, the venal pollies, trying to curry favour with an equally craven electorate to augment their electoral support, were breaching the law.  These illegalities serve to underscore just how important the Reserve Bank Act has been; politicians cannot help meddling in things about which they know very little.  But their meddling has more venal, political self-interest splattered all over it than dung on a cow shed floor.  Hooray for the Reserve Bank Act which has done a good deal to keep the shed free of dung.

To underscore the point, Prime Minister John Key joined the ignominious line of corrupt politicians yesterday, criticising the Reserve Bank, trying to influence its monetary policy settings.This from Stuff:

Prime Minister John Key has sent a shot across Reserve Bank governor Graeme Wheeler's bows, effectively warning him not to keep interest rates unjustifiably high as inflation heads lower.  But Key stopped short of calling for an interest rate cut at the bank's monetary policy review on Thursday.  He noted that while the bank had flexibility it should set monetary policy so that inflation returned to the midpoint of its 1 per cent to 3 per cent target band.

Inflation is currently 0.8 per cent and heading lower. Wheeler said in February it "could become negative for a period during 2015 as the direct and indirect impacts of falling oil prices feed through the economy". But it would rise towards 2 per cent, "albeit more gradually than previously anticipated". In December, he tipped inflation to be back at that level by 2017.

Key said oil prices were coming down, the exchange rate was still reasonably strong and imported inflation appeared low. In light of that "it's not an option for the bank to raise interest rates".  His comments are unusual, given that ministers normally steer away from commenting on monetary policy to preserve the bank's independence. [Emphasis, ours.]

Two points.  Firstly, the media (and the public) tend to cut the present Prime Minister a lot of slack when it comes to economics and business because Key made his fortune in financial markets.  They think he must know what he is talking about when it comes to economics and business.  But he was a currency trader--which made him a cowboy of the cowboys.  He has no professional experience at all in containing and fighting inflation.  He would have only ever had an interest and experience in making money out of inflation--with some success.  In his political career he is demonstrating that little has changed. 

Secondly, the Bank's policies call for it to separate out external systemic shocks to inflation statistics, such oil price movements (up or down).  We note that the PM is trying to jawbone the Governor into suspending its own transparent policy and start including oil price movements in its calculations.  It is at this point that Key betrays his venality.  When oil prices were rising, politicians are happy for the RB to ignore the increasing price of oil when calculating inflation rates.  It tempered the tightening of monetary policy, keeping interest rates lower.  But when oil prices are coming down--well, that's another story.  You had better take note of oil prices, Governor, and act accordingly.  "It's not an option for the bank to raise interest rates!"

Herein we have displayed the Key Doctrine of monetary policy: all movements and settings should coincide with the interests of maintaining his poll rating numbers.  Which is the precise evil the Reserve Bank Act was passed to obliterate.  Hooray for the Reserve Bank Act.  One more venal politician demonstrates why the Act is such a boon to us. 

We do not expect the present Governor of the RB, Graeme Wheeler will be amused.  He has demonstrated thus far that he one Governor not for turning.