When inflation first emerged, the bank said it would be temporary. Relative to the size of our economy, the Reserve Bank’s programme of quantitative easing was bigger than the United States' or the Eurozone’s.
The central bank was wrong to believe money printing would not be inflationary. It engineered the present recession.
Last week’s announcement included a rare admission that the bank may have been in error. The bank said that “new data imply that GDP [Gross Domestic Product] growth was stronger than previously measured by Stats NZ from 2022 until March 2024”.
The “1% contraction in GDP in the September 2024 quarter was larger than assumed in the November statement”.
The central bank says Stats NZ’s GDP and inflation reports are out of date when released and then subject to significant revisions.
As the bank has been using faulty data, it is highly likely that interest rates have not been set correctly.
Last week’s Monetary Policy Statement relies on Stats NZ GDP data for September. The central bank’s inflation estimates rely on the December Consumers Price Index (CPI) data.
The suggestion that Stats NZ be funded to produce monthly reports will just triple the number of inaccurate reports. The errors are inherent in the way official statistics are collected.
Delay and revision of official statistics is an issue worldwide.
The real question is why has the Reserve Bank relied on official statistics even though they are known to be prone to error? Is it because it is an excuse for the bank’s failures?
The bank claims it also uses other information, but is ignoring accurate, timely information on GDP and inflation.
Massey University has invented a world-leading artificial intelligence (AI) program to calculate the country’s GDP and inflation in real time. The program uses data collected daily and AI to calculate today’s GDP and inflation. The university publishes the data on its website www.gdplive.net.
The website posts its previous predictions and plots it against official data.
GDPlive accurately reported the depth of the winter recession and the economic revival in spring. Both were missed by the bank.
If the Monetary Policy Committee used GDPlive statistics, it would know that annual GDP was -1.322%. The last-quarter GDP was +0.113%. On the day of the central bank’s OCR announcement, GDP was at +0.536%.
The bank used Stats NZ CPI data to say inflation is 2.2%.
If it had used GDPlive, it would have known inflation is 2.18%.
The difference, while small, is significant. The direction of prices is important.
Stats NZ reported that inflation was also 2.2% in September. Relying on official statistics, the bank, when fixing interest rates, would have assumed prices have plateaued. GDPlive’s data shows that inflation is falling.
The small difference in the data should have made a big difference to interest rates.
Central banks utilise the Taylor formula to calculate the OCR. Putting it simply, the Taylor rule says the OCR should be the difference between current inflation, 2.18% and the target, 2%, and the current output gap.
GDPlive, using its real-time data and the Taylor Rule, calculates the OCR should not be 3.75% but 3.6%.
The website states the “gap to optimal OCR [is] -0.6%”.
GDPlive’s AI says interest rates should be lowered by half a percentage point.
Ask any mortgage holder. Half a percentage point is huge.
Monetary policy needs a partner, fiscal policy. The Reserve Bank again used official data, the Treasury’s Half Year Economic and Fiscal Update, to estimate the effects of fiscal policy. Treasury forecasts can be wildly inaccurate.
The bank demonstrated profound ignorance of government when it stated: “Government expenditure is assumed to continue to decline slowly as a share of potential GDP.”
Social welfare and health account for approximately 50% of total government spending. Unless we suddenly stop aging, health and welfare spending will increase.
Before the Chinese navy conducted live-round exercises in the Tasman Sea, a significant increase in defence spending was signalled.
Spending, the deficit and borrowing are increasing. Interest payments, which are around 7% of government spending, must increase.
A competent Reserve Bank would warn that the projected path of the Government’s spending is unsustainable.
The Reserve Bank caused the cost-of-living crisis that helped defeat the last Government. Now the Reserve Bank’s refusal to use Massey University’s AI is helping defeat another Government.
