Photo: RNZ
Criticism of the Reserve Bank for "stuffing up" its handling of inflation by keeping interest rates higher than they needed to for longer is not completely fair, commentators say.
The Reserve Bank has been surprised by the pace of decline in the inflation rate.
In May, it was forecasting that inflation would hit 3 percent in the September quarter and 2.9 percent in the December quarter.
In fact, the CPI increased by just 2.2 percent in the year to September.
Salt Funds Management economist Bevan Graham said the Reserve Bank's May monetary policy statement, in which it kept the official cash rate at 5.5 percent and even hinted another increase could happen, was ill-judged.
But he said the bank had since "pivoted pretty quickly" and it was not to blame for tradeable inflation - that is the inflation that is driven by international prices - coming down more quickly than expected.
"Tradeable inflation is a bit hard to predict," he said. "There are global forces at play when we are talking about imported inflation and the Reserve Bank essentially has no ability to influence that. Where the Reserve Bank has influence is on domestically generated inflation pressures. That's running at 4.9 percent, it's moving in the right direction in the sense that it's coming down but it's still a bit too high and there's still work there to do."
He said if the Reserve Bank was sticking to its May line that it would not cut until August that would definitely be a mistake. "As they released the market was more right on the growth and inflation outlook than they were they changed their tone pretty quickly and will probably cut by 50 basis points again in November."
He said the policy mistakes were made at the start of the tightening process when the bank did not move fast enough.
"Then that was a whole new environment with the pandemic and how we were going to come out of that and how the economy was going to respond. That's where the mistake was and to some extent we're still paying for that."
But he said a concern from here was that tradeable inflation had traditionally been lower than domestic inflation, and that might not necessarily be the case in future. That would give the bank less room to move.
"That means we've go tot do a much better job of keeping domestic inflationary pressures in check, which goes to the issue of productivity growth."
Westpac chief economist Kelly Eckhold said the Reserve Bank wasn't the only forecaster surprised by the drop in tradeable inflation.
"There have been significant falls in oil prices for example, so we do see inflation in the tradeable part of the CPI fall more than might have reasonably been expected a few months or six months ago … there's also been a general oversupply in global manufacturing that has meant lower imported goods prices have flowed through to New Zealand a bit more quickly than was expected before.
"It's probably bit unreasonable to blame the Reserve Bank for this short-term inflation forecast error. If you compare most private sector forecasters, they had similar surprises. Oil is at least $20 a barrel cheaper than it was when the bank was putting together its forecasts in May. Forecasting oil prices when daily events are going on in the Middle East is always challenging."
He agreed that with imported inflation as low as it is now, there was more likelihood that it would increase rather than fall over the years ahead.
Infometrics chief forecaster Gareth Kiernan said the only indirect influence the Reserve Bank had on tradable inflation was via the exchange rate, and the New Zealand dollar had not been strong.
But he said that did not mean criticism of the Reserve Bank's approach was unfair.
"At start of this year, the Reserve Bank was rightly focused on the risks around non-tradable inflation. However, the bank's forecasts have shown for some time that it expected headline inflation to be back within the 1 percent to 3 percent target band by the end of this year.
"That is important because headline inflation is a key factor influencing inflation expectations and pricing behaviour. The bank also needs to be setting monetary policy in a forward-looking manner, but it seems to have underestimated or lacked the foresight to understand how significant the effects of its monetary tightening would be on economic activity. If the bank wasn't behind the curve in terms of loosening monetary conditions, it wouldn't need to cut by 50 basis points or more at any meeting.
"I know I sound like a broken record, but the bank's forecasts and statement in May were so at odds with what everyone else was seeing in the economy, and with their subsequent actions, that it's hard to be confident that they really know what they're doing. Even the larger cut this month was inconsistent with their most recent forecasts, despite the data continuing to be broadly in line with their expectations."
