THE RESERVE BANK, INFLATION AND UNCERTAINTY
Mark Lister, 15 February 2017
The Reserve Bank sounds nervous. In last week’s monetary policy statement (MPS), the word “uncertainty” came up eleven times, by my count.
To be fair, it’s kind of their job to lose sleep over things like not enough inflation, too much credit growth and whether their estimates of the output gap are accurate enough.
Still, eleven is about double the average of the last five reports, and we need to go back to September 2015 to find a time they were this worried. In that statement, there were no less than 18 references to uncertainty.
Things were indeed looking shaky back then. The global economy was facing a commodity price rout, concern over the state of the Chinese economy, and fears of a Greek default.
Oil prices had collapsed to US$50 a barrel, about half the price of a year earlier, and just about every other commodity had followed them down. This included dairy, which had been languishing for most of the year, with Fonterra forecasting a sub-breakeven payout of $4.40.
The annual inflation rate here in New Zealand was 0.3 per cent, and people were talking about a Japanese-style deflationary spiral into the unknown. To top things off, the Federal Reserve in America was about to increase interest rates for the first time in a decade, ending a long period of easy money.
All of this sharply dented investor sentiment. The oil price fell another 40-odd per cent to under $30, the Fonterra payout ended up even worse than expected at $3.90, and US shares fell sharply during the first few weeks of the new year.
It was about this time that a research analyst at a prominent global bank famously told their clients to “sell everything”. That recommendation made headlines around the world, and I recall taking quite a few calls that day.
His train of thought was entirely logical, but he was still dead wrong and possibly works in their compliance team these days.
Oil has rebounded strongly since then, the dairy payout now starts with a six rather than a three, and inflation has crept back above one per cent. The Fed has pushed through two interest rate hikes and no-one has really batted an eyelid, while sharemarkets are up around 20 per cent.
There was a long list of worries a year-and-a-half ago, and it’s an equally crowded one today.
While inflation and interest rates are finally going in the right direction, the world’s debt problems haven’t improved. Greece is no longer such a risk, but Italian banks are in trouble and the French election is a risk. The jury is still out regarding China, and that might be the case for some time yet.
Then there’s the new President, who can probably take credit for at least half of the instances of that particular word in the statement.
While some concerns have faded, it’s a whole different set of challenges the incoming Governor will face. I don’t envy him or her, and I suspect Mr Wheeler doesn’t either.
This article was published in The New Zealand Herald on 15 February 2017.