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Speaker 1: The Reserve Banks taking a hard look at itself. Findings

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Speaker 1: aren't exactly shocking, are they. Its own reports says it

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Speaker 1: didn't hike interest rates fast enough to tackle COVID inflation.

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Speaker 1: Interest rates fell to just zero point two five percent

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Speaker 1: in twenty twenty one, they rocketed up to five point

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Speaker 1: five and twenty twenty three, this is as inflation hit

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Speaker 1: seven point three percent. Doctor Eric Crampton, chief economist at

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Speaker 1: the New Zealand Initiative, Eric, good morning, Good morning. Have

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Speaker 1: they hit the nail on the head?

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Speaker 2: Well, they've identified some of the problems. They noted some

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Speaker 2: of them were a little bit surprising, but I guess

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Speaker 2: we should have realized what was going on. They noted

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Speaker 2: that some of the monetary policy models that couldn't deal

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Speaker 2: well with supply shocks, and we had dealt with the

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Speaker 2: supply shock in COVID. They're ended sim model, which is

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Speaker 2: the core backbone that they used for forecasting what's going

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Speaker 2: on in the world. It wasn't able to handle the

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Speaker 2: kind of supply shock that has a lot large cross

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Speaker 2: country interactions. So they're trying to beef that up. They're

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Speaker 2: trying to beef up a lot more real time data

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Speaker 2: to a better handle on what's going on. I guess

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Speaker 2: one of the disappointing bits is that they're saying in

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Speaker 2: hindsight on some of this. It wasn't just hindsight. There

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Speaker 2: are plenty of people saying at the time that the

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Speaker 2: reserve Bank was printing too much money, that it would

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Speaker 2: have strong inflationary consequence, and that it was fundamentally the

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Speaker 2: wrong response to a large negative supply shock. So what

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Speaker 2: I mean by that reserve banks are used to dealing

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Speaker 2: with things like the GFC from the two thousands or

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Speaker 2: other financial crises, where the shock is coming out of

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Speaker 2: the financial side of the economy. It's not coming out

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Speaker 2: of the real side of the economy, and they'll often

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Speaker 2: deal with that by printing money, reducing interest rates to

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Speaker 2: boost aggregate demand, to get people spending a bit more again,

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Speaker 2: and things then sort of ride themselves out. That doesn't

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Speaker 2: really work when the underlying productive capacity of the economy,

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Speaker 2: both here and elsewhere, has substantially shifted inward. Just every

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Speaker 2: combination that you'd have just won't be as productive as

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Speaker 2: it used to be because COVID is keeping everybody at home.

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Speaker 2: Factories couldn't run, cold stores weren't running well, nothing was

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Speaker 2: really working well, and if you pump money into that environment,

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Speaker 2: you just have more money chasing the same number of goods,

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Speaker 2: and that ramps prices up. They should have realized this

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Speaker 2: a lot faster. We'd been putting up notes on this

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Speaker 2: from our shop around June twenty twenty. I think I

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Speaker 2: had a blog post on it in April. Bryce Will

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Speaker 2: consented seeing it, but also folks like Grant Spencer and

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Speaker 2: Arthur Grimes had been talking about the asset price run

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Speaker 2: up that you're going to see from the monetary policy.

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Speaker 2: We had so great that now four or five years later,

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Speaker 2: they're fixing some of this, But it's it would have

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Speaker 2: been better if they had identified it earlier.

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Speaker 1: It would avoid absolutely Eric So in a nutshell, you

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Speaker 1: know that I've admitted that they were too slow. If

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Speaker 1: that'd been quicker, would that have been as state? Did

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Speaker 1: the speed effect the destination and therefore would we not

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Speaker 1: be in as much shite as we are now.

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Speaker 2: I don't have the big macro forecasting models behind me

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Speaker 2: like they do. I would expect that had they realized

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Speaker 2: by mid to late twenty twenty that they were really

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Speaker 2: dealing with a large supply shock rather than a shock

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Speaker 2: from the demand side of the economy. They would have

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Speaker 2: engaged in less of the initial money pump printing, fewer

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Speaker 2: large scale acid purposes purchases, and less of a reduction

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Speaker 2: and interest rates, and they would have started to increase

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Speaker 2: those again more quickly. That should have avoided hitting the

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Speaker 2: peaks that we did hit because we wouldn't have hit

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Speaker 2: the same inflation outcomes that we hit. But the Reserve

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Speaker 2: Bank has had to be fighting these past couple of years.

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Speaker 2: Isn't just the inflation that got away from it, but

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Speaker 2: also the really high expectations about inflation that started getting

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Speaker 2: baked in. So if you look back a couple of

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Speaker 2: years ago, inflation expectations were running well north of the

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Speaker 2: target range that the Reserve Bank tries to hit. That's

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Speaker 2: what we call unanchored. So if everyone expects that the

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Speaker 2: Reserve Bank is going to do a good job and

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Speaker 2: keep inflation around two percent, it has a lot easier

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Speaker 2: time of doing that. When people start expecting more inflation,

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Speaker 2: they have a hell of a time getting it back down,

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Speaker 2: and we're experiencing some of the consequences.

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Speaker 1: Yeah. Plus, and I also had the government spending, didn't

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Speaker 1: I don't be Eric Crampton the New Zealand Initiative.

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