Dr Brash was tamer of the inflationary beast

By BRIAN FALLOW

Donald T. Brash. For nigh on 14 years it has been his signature on the currency, and his job to see that when the notes wear out they are still worth close to their value when newly minted.

To be the stern face of monetary policy is generally a thankless role.

Mention his name to many people and their eyes narrow, their lips curl.

Brash is the fellow who raises interest rates. His job is sometimes, in the words of American counterpart Alan Greenspan, to take away the punch bowl just when the party is getting going.

At his press conference yesterday, Brash quoted another former Federal Reserve chairman, who said: "An unpopular central banker is not necessarily a good one. A popular central banker is almost certainly a bad one."

The taxi driver who took me to the press conference was no Brash fan, but he nonetheless recalled the struggle to pay 27 and 28 per cent interest on loans in the 1970s.

Since Brash took on the role of first independent Governor of the Reserve Bank in September 1988, with the statutory task of achieving stability in the general level of prices, it has always been apparent that he was more than just a technocrat with an allotted task.

He was a man with a mission.

Inflation was distortionary and destructive, the theft of people's savings. He was out to cage the beast and keep it closely confined.

That has been his job and he has done it.

Inflation averaged more than 10 per cent a year in the 1980s, and only about 2 per cent in the 1990s.

Brash has been aided by a general disinflationary trend in the wider world economy, and by micro-economic reforms which have exposed more of the economy to the disciplines of inflation.

But squeezing out inflation and the cost-plus mentality from the economy has also been a battle of wills between the Governor and the vast mass of price and wage-setters in the economy.

Brash is widely perceived as hawkish, too quick to raise rates and too slow to lower them, too reluctant to give the economy the benefit of the doubt.

His critics in the financial markets and among business leaders and politicians acknowledge his success in taming feral inflation expectations, but accuse him in latter years of the successful general's tendency to fight yesterday's battles or be haunted by yesterday's mistakes.

But these are subtle and debatable judgments.

The inflation record suggests, at least at first glance, that he has been willing to use all the bandwidth allowed him by successive policy targets agreements.

At one stage, when his target was still a tough 0-2 per cent, inflation was at or above the top of the range for two straight years. We have just had a year when it was 3 per cent or higher.

Despite that, inflation expectations remain well anchored within the target range.

Over the past five years, inflation has been above the mid-point of the range as often as below it.

Inevitably in a 14-year tenure there have been policy mistakes, which Brash acknowledged for the umpteenth time yesterday.

He was too slow to raise interest rates in 1993-94 when the economy came out of the deep recession of the early 1990s.

Though he was making no excuses yesterday, at the time there was a lot of hope that the painful reforms of the 1980s and early 1990s had dramatically raised the economy's sustainable growth rate, perhaps to 3.5 to 5 per cent.

By the time it became clear the sustainable growth rate was nothing like that, the economy had run away on him and he had to stand on the brakes. He raised rates 5 percentage points within nine months.

He later underestimated the fallout from the Asian crisis and was too slow to ease policy.

He might have added to this list of mistakes the ill-fated, too-clever-by-half monetary conditions index, which was abandoned after 18 months as a means of signalling policy in favour of the more conventional official cash rate.

But those mistakes have to be weighed against the over-riding achievement of taming inflation, especially as it was trail-blazing stuff. There was no international model to follow.

Inflation-targeting independent central banks are now the norm among developed countries, but the territory was unknown when New Zealand embarked on the course in 1988.

Although the Reserve Bank has tended to be seen as a one-man band, Brash's management style by all accounts has been the opposite of authoritarian.

Economists who have worked in senior posts at the bank speak of his open-mindedness and his willingness to canvass their views on the economic cycle and the next monetary policy move, even though the final word was his alone.

Explaining his decision to step down as Governor and enter the political arena, Brash first ruled out three obvious possibilities.

He is not bored; there has been no problem in his relationship with Finance Minister Michael Cullen; and the criticism of his decision to start raising interest rates goes with the territory.

What he wants to do is to make a contribution in areas beyond a central banker's reach.

"We desperately need to find ways to step up our economic growth rate.

"Unless we are able to increase our trend growth rate above the modest levels of the past, unless we are able to bridge the growing gap in living standards between New Zealand and those countries to which our skilled people can easily move, the future of New Zealand society will be very bleak indeed.

"Faster growth is an absolute prerequisite if we are to provide better quality employment, better quality health services and better quality education for all New Zealanders.

"Faster growth is an absolute prerequisite if we are to avoid an ever-widening gap between the incomes of those with internationally marketable skills and all the rest of us.

"Faster growth is an absolute prerequisite if we are to avoid an ever-growing dependence on the savings of foreigners, with the gradually increasing vulnerability which that inevitably entails for us as a nation."

It would be easy to dismiss such words as the rhetoric of a budding politician. But we can take him at his word.

Brash has voiced all of these concerns before, and has chafed at the limitations of a central banker.

He has had to recognise the limits of the current sustainable growth rate and to trim the monetary sails accordingly, while being unable to do anything much to raise the rate.

At times his frustration has been palpable.

Brash is a son of the manse. His father headed the Presbyterian Church in New Zealand. From time to time he has been unable to resist the temptation to climb into the pulpit, as in the Hayek lecture in 1996 and his speech to the Knowledge Wave conference last year.

In both cases he drew a fusillade of criticism for straying into the realm of politicians. Now, at 61, he has gone there in earnest.