MacCulloch on who to blame for inflation

Robert MacCulloch is a professor macroeconomics. He writes:

Let’s build the prosecution’s case. Exhibit A is that the defendants already admit it. At the last meeting of the Bank’s Monetary Policy Committee (MPC), members confessed that “annual consumer price inflation is expected to peak around 7 per cent in the first half of 2022”.

Are the shocks hitting us short to medium term? No.

The bank says, “A broad range of indicators are highlighting … ongoing inflation pressures.”

Has the misconduct of monetary policy, which has been inciting the inflationary breach, ended? No. The bank says that the Official Cash Rate (OCR) “is stimulatory at its current level”.

Not only has NZ’s inflation target been ignored, but those responsible for achieving it are still pouring gasoline on the fire.

Yep inflation is three times what it should be, and the Reserve Bank still has a stimulatory setting for the official cash rate!

Exhibit B comes from Professor John Taylor, inventor of the “Taylor Rule”. That rule is a simple formula explaining how a Central Bank can quell an inflationary shock. It has proved a robust guideline when setting Official Cash Rates around the world.

The rule states that an increase in the OCR of more than one percentage point is required when inflation increases by one percentage point. The reason is to ensure that real interest rates go up to reduce borrowing.

Without a rise in real rates, debt-financed spending can continue to fuel inflation.

So what’s been going on in NZ? Annual inflation, measured at March 2021, was 1.5 per cent. Annual inflation at March 2022 was 6.9 per cent. In other words, inflation has risen by more than five percentage points this past year.

However, the RBNZ has only increased the OCR by a little over one percentage point over the same period, sending short-term real rates deeply negative.

The Taylor Rule is powerful evidence that there has been no intention, whatsoever, of our authorities to meet their obligation of keeping inflation on target.

This is important to note. The Reserve Bank has chosen to keep inflation high, despite being contractually obliged not to do so.

After keeping the cash rate so low for so long and embarking on a $53 billion Quantitative Easing (QE) programme, the bank is now in panic mode. It is panicking at the prospect of a full-on policy reversal that will highlight past mistakes and provoke widespread debt distress.

Those having trouble paying back their mortgages in the next few years can blame our RBNZ Governor and Finance Minister. They encouraged a borrowing binge to buy houses at wildly inflated prices, financed by dirt cheap credit, turning a blind eye to the breach of the target to which they mutually agreed and not learning the lessons of the Global Financial Crisis in 2008.

Printing cheap money comes with a cost.

The official defence is that other Central Banks are just as bad. That’s not true. Not one of them operates under the same laws as ours.

The US Fed Chairman and Treasury Secretary have not broken any agreement. By comparison, our RBNZ Governor and Finance Minister have driven a truck through the single most important agreement underpinning our economic security since 1989.

I don’t understand how the Reserve Bank Governor hasn’t offered to resign. He basically has one job – keep inflation under 3%. It’s 6.9%.

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