The Kākā by Bernard Hickey (private feed for simon.wheatley@acgedu.com)

Govt gaslights voters on health costs/GDP

Briefly in my Picks ‘n Mixes and Daily Chorus on Wednesday, September 10, the top news, scoops and deep-dives in Aotearoa’s political economy around housing, poverty and climate are:* To justify continued health sector wage and hiring restraint, the Government has repeatedly argued New Zealand’s health spending was actually higher than similar OECD countries as a share of GDP, having risen during Covid. * But a fresh report from Auckland University health finance experts shows the argument is specious, being based on 2018 data and including GST, when fair comparisons with other countries don’t include GST.* The report also argues that the current Government’s shift towards more privately provided and financed health care is most likely to increase overall costs.* Elsewhere in the news this morning: Shane Jones wants to look at nationalising the power gentailers; the Government is looking at removing ‘third parties’ from its own fast-track process; lower manufacturing volumes led BNZ to forecast a 0.5% fall in June quarter GDP; and, Chris Hipkins has backed off suggestions of a higher inflation target for the Reserve Bank.Paying subscribers normally get more detail and analysis in the video and podcast above, and all my Picks n’ Mixes below the paywall fold. But I have decided to open this one up immediately, given the public interest involved and thank paying subscribers in advance.Chart of the day: The pressure of sinking lidsPicks n’ Mixes for Wednesday, September 10My Top Pick n’ Mix Six* The Scoop of the day is from Thomas Coughlan for NZ Herald-$ (gift link): Treasury paper Govt tried to hide says 'accept a lower level of public service'* The Column of the day is from Audrey Young for the NZ Herald-$ (gift link): Luxon coup talk and why rolling a PM is far harder than it sounds* The Deep-dive of the day is from Laura Walters for Newsroom: Treasury warns Govt about increasing cost of its tough on crime policies* The Op-Ed of the day is by Health academics Jenny Carryer, Andrew Jull, Nicolette Sheridan for The Post-$: Community health, patient safety under increasing threat. Nurse leaders being silenced by organisational policy.* The Doc of the day is from the Association of Salaried Medical Specialists, which commissioned a report from Tim Tenbensel and Paula Lorgelly from the University of Auckland titled: NZ health financing and expenditure: A comparative and historical review 2000-2023.* The Sign of the Times news of the day is via Emma Andrews for RNZ: Australian marae gains $1m from Australian governmentScoops & Breaking news this morning* Thomas Coughlan for NZ Herald-$: Shane Jones wants to consider re-nationalising power companies in energy shake-up* Laura Walters for Newsroom Pro-$: ‘Frustrated’ ministers ready to accelerate fast-track Govt wants to restrict expert panels from calling ‘third parties’* Glenn McConnell for Stuff: Tens of thousands spent on PM’s mountain trip* Ethan Manera for NZ Herald-$: James Cameron sought David Seymour's help to try to speed up citizenship bid* Phil Pennington for RNZ: Why NZ's new maritime helicopters cost $400m each Australia recently paid $82m each for the same choppers.* Laura Walters for Newsroom: Surcharge ban is ‘Cost of living virtue signalling’The Best of the RestPolitics & Geopolitics* Glenn McConnell for Stuff: Ministers want ‘Kiwi values’ pledge. Luxon not keen* Russell Palmer for RNZ: Adopting Australia's inflation target 'insane economic illiteracy,' says Willis* Thomas Coughlan for NZ Herald-$: Chris Hipkins hoses down discussion on Labour tolerating higher inflation* Russell Palmer for RNZ: Willis says not releasing texts about Orr's resignation met transparency expectations* Lillian Hanley for RNZ: Labour back to drawing board after by-election defeat* Anna Whyte for The Post-$: Marshmallows, briefly banned, are back in hospital cafés after minister’s intervention* Deep-dive by Julie Jacobson for The Post-$: A TOP dog, or is The Opportunities Party forever doomed to ‘zombie’ status?Economy, Business, Media & Tech* Sam Smith for Stuff: Government set to launch new ‘major events’ fund* David Hargreaves for Interest: June quarter manufacturing slump signals possibly bigger than expected GDP fall * Zane Small for Stuff: 10,000 fewer jobs in three months: Is a ‘recovery’ really underway? Auckland lost 4828 jobs in the three months to June.* Garth Bray for BusinessDesk-$:IRD property sector blitz finds $228m in unpaid tax* Column by Duncan Greive for The Spinoff: Sean Plunket now stands alone on his Platform and Stewart Sowman-Lund for The Post-$: ‘Changes' planned at long-running Metro magazine amid ‘tough times’* Erik Frykberg for Interest: State-owned Pamu allows farmers to buy equity* Tom Pullar-Strecker for The Post-$: Cost of work deaths tops $1b as report finds links with poor productivity. Business Forum report.Housing, Transport & Infrastructure * Nick James for RNZ: Nationwide $1.4b ticketing system delayed by a year* Amy Ridout for Stuff: Why did a council asphalt a road cone into the footpath?* Anne Gibson for NZ Herald-$ (gift link*): Three new Mt Eden blocks up to five levels, 135 apartments* Column by Simon Wilson for NZ Herald-$ (gift link): Why do people think Joni Mitchell wanted housing sprawl?* RNZ: Landlord crammed tenants into caravans, garages and a bus* Natalie Akoorie for RNZ: 11 months, $38,000, and still no consent for granny flat* RNZ: 'This is a game-changer' - New trains on way for lower North IslandCouncils* Joel MacManus for The Spinoff: The mayors, the media man and the mystery shrouding Upper Hutt’s election * Sarah Curtis for The Northern Advocate: Far North council exodus: 219 staff in three years, grievances cost $1.27m* RNZ: Two mayors to be elected unopposed in local government elections* David Williams for Newsroom Pro-$: Queenstown approves cableway projectPoverty, Health, Education, Living Costs, Incomes & Crime* Maxine Jacobs for The Post-$: ‘The human cost of institutional failure’: Māori dying younger and sicker. Māori are 25% more likely to die from cancer than non-Māori, more than twice as likely to die from cardiovascular disease, and continue to receive inequitable health care, an iwi health monitoring report says.* Emma Ricketts for Stuff: ED like a ‘mass casualty situation’: Are this year’s winter lurgies abnormal? Amid a late spike of winter illness, St John says there has been “unprecedented demand” for ambulances.* Deep-dive by Rebecca Macfie for Newsroom: Tea, scones, and justice A report on a different kind of solution for young offenders. It’s not a boot camp.* Explainer by Nik Dirga for RNZ: Why our police don't wear body cameras* Op-Ed by for Otago Uni’s Rose Crossin & Laura Joyce for Newsroom: Government ‘prioritising alcohol industry over health’ The Government’s decision to reverse its support to limit the trading hours of off-licences, and stop communities objecting to alcohol licences won’t reduce alcohol harm.* Melissa Nightingale & Azaria Howell for NZ Herald: A third of Wellington ED patients treated in corridors, where 10% more people die, business case shows* RNZ: Tackle food insecurity at home before exporting: Salvation Army report* Susan Edmunds for RNZ: Hundreds of thousands charged late fees for power* John Gerritsen for RNZ: Polytechnics had double the students a decade ago* Hanna McCullum for The Post-$: Uni energy grant uptake more than triplesClimate & Environment* Deep-dive by Fox Meyer for Newsroom: Who Benefits: How a tiny charity rewrote NZ’s environmental law* Henry Cooke for The Post-$: Government still mulling methane target, with coalition partners yet to agree* Marc Daalder for Newsroom Pro-$: Climate minister encourages calling out dairy industry* Pattrick Smellie for BusinessDesk-$: Watts to challenge gentailers on 2026 'energy security'* Rob Stock for The Post-$: Climate minister calls emissions targets ‘solid’ amid criticism of low ambition. Simon Watts mounted a tame defence of current emissions policies, in speaking to an audience that was clearly wanting more.* Column by Rob Stock for The Post-$: Trump’s policies could add 0.2 degrees to peak climate change, and nine other takeaways from this week’s Climate Change and Business conference in Auckland.* Lochlan Lineham for NZ Herald: 'Huge step': Researchers score $3m to turn waste products into sustainable foods* Rob Stock for The Post-$: Hipkins teases Labour’s emissions-reduction ambitions.* RNZ: Playing 'I-spy' with urban emissionsDocs of the day * Stats NZ published data on the performance of core non-trading activities of New Zealand's territorial and regional councils in the June quarter.* Rabobank and KiwiHarvest published their annual Food Waste Survey for 2025, finding New Zealanders are wasting less of their food than two years ago.Cartoon of the day: RebrandedKa kite ano. BernardPS: My apologies for this email not being sent yesterday. I am travelling at the moment and will be back to a more normal schedule tomorrow. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

The Weekly Hoon: RBNZ independence, Amazon’s data centres & Clark & Key in Beijing

The podcast above of the weekly ‘Hoon’ webinar for paying subscribers on Thursday night features co-hosts Bernard Hickey and Peter Bale talking with regular guests Cathrine Dyer and Robert Patman about the global economy, local and international politics and climate change. This week’s special guests were tech activist Julian Oliver and The NZ Herald’s Wellington Business Editor Jenee Tibshraeny.This week’s Hoon featured:* An initial discussion between Peter and Bernard about burrowing through to the other side of the world, as depicted in Vincent Ward’s 1988 movie The Navigator: A Medieval Odyssey.* Peter, Bernard, Cathrine and Julian discuss this week’s re-announcement of Amazon’s plans for data centres, supposedly in New Zealand, including the implications for climate change, water usage, data sovereignty and the erosion of Aotearoa’s tax base. Julian recently featured on Q+A. Bernard referred in the discussion to this report, Big Tech, Little Tax, published yesterday by Tax Justice Aotearoa and Better Taxes for a Better Future. * A discussion with Cathrine about ACT Leader David Seymour’s call this week for Aotearoa to withdraw from the Paris Agreement.* A discussion with Robert about former PMs Helen Clark and John Key attending commemorate Xi Jinping’s military parade in Beijing to commemorate the 80th anniversary of Japan's surrender at the end of World War II. We discussed Anne-Marie Brady’s criticism of their attendance in this Newsroom Op-Ed.* A discussion with Jenée about the resignation last week of Neil Quigley as Chair of the Reserve Bank and her commentary in the NZ Herald that Finance Minister Nicola Willis shouldn’t have waited until the public discovered they had been misled before really cracking down on the Reserve Bank board.The Hoon’s podcast version above was recorded on Thursday night during a live webinar for over 200 paying subscribers and was produced and edited by Simon Josey.The Hoon won the silver award for best current affairs podcast in this year’s New Zealand Podcast awards. (This is a sampler for all free subscribers and anyone else who stumbles on it. Thanks to the support of paying subscribers here, we’re able to spread my public interest journalism here about housing affordability, climate change and poverty reduction other public venues. Join the community supporting and contributing to this work with your ideas, feedback and comments, and by subscribing in full. Remember, all students and teachers who sign up for the free version with their .ac.nz and .school.nz email accounts are automatically upgraded to the paid version for free. Also, here’s a couple of special offers: $3/month or $30/year for under 30s & $6.50/month or $65/year for over 65s who rent.)Ngā mihi nui.Bernard This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

Why National can't afford true RBNZ independence

Briefly in this deep-dive below on the political economy of Reserve Bank independence:* A debate is now raging around the Government’s pressuring of the Reserve Bank on interest rates and bank capital policies, along with the opaque and messy exits of both its Labour-appointed Governor, Adrian Orr, and its long-time Chairman, Neil Quigley.* Both Finance Minister Nicola Willis and PM Christopher Luxon have breached the 35-year-long convention of not putting pressure on the Reserve Bank, which was designed to maintain a reputation for independence. They have breached the convention repeatedly and both before and after getting into power.* They started breaching it before they were elected by opposing the re-appointment of now-departed Orr and being hyper-critical of his actions while Governor during Covid. They crossed the rubicon by suggesting sacking him and effectively engineered his exit by slashing his Budget more than 20%. Current Deputy Prime Minister David Seymour openly called for Orr’s removal. * Willis and Luxon then allowed a cover-up of the circumstances of Orr’s exit. When it was exposed, they used the opportunity to completely reset the leadership of the Reserve Bank by throwing Quigley under the bus.* The current National-led Government has painted itself into a corner by lashing its future to economic growth this year and next year, and by focusing its entire economic strategy on reducing interest rates.* That meant when the economy didn’t cooperate and the housing market stalled, the Government had no choice but to exercise pressure both publicly and privately, through its words and actions. It bet its future on lower interest rates driving the economy, rather than any substantial structural reform. * There is more to come, with the potential for further jawboning of interest rates lower by the Beehive and the watering down of the long-running (but initially temporary) Loan to Value Ratio (LVR) restrictions and the Orr-orchestrated Debt to Income (DTI) multiple restrictions, just in time for a pre-election housing market boom in 2026.* In the long run the risks are, as pointed out by RBNZ Chief Economist Paul Conway via The Kākā last week, that Governments that meddle with monetary policy end up with higher inflation and interest rates.I have published this email, video and podcast to the public fully and immediately. This work I do in the public interest is only possible with the help of paying subscribers. So please subscribe to support this work. Paying subscribers get access to our chat channel and can comment on articles. They also get exclusive access to webinars and some articles.Why National now can’t afford true RBNZ independenceWhen you promise ‘growth, growth, growth’ and bet that lower interest rates alone will produce it, it’s only natural and necessary to want the owner of interest rates, the Reserve Bank, to help deliver that growth when it doesn’t arrive on schedule.The trouble is that’s not how Aotearoa’s political economy has operated for 35 years. The 1989 Reserve Bank Act created the world’s first truly independent inflation-targeting central bank. Finance Ministers and Prime Ministers in particular, and elected politicians in general, were very careful, until November 8, 2022, not to sharply criticise the bank or its staff over policy. That all changed when Willis and Luxon wrote to then-Finance Minister Grant Robertson opposing his re-appointment of Orr for a second five-year term. Find out more about that from this piece I wrote the next day:Willis and Luxon kept criticising Reserve Bank policy and Orr once in power, encouraging back-bench Government MPs to call for Orr’s tougher capital requirements to be junked, and, as we learned last week, pressuring the RBNZ to cut interest rates even more than it did last month. The economy’s failure to fire this year has ramped up that pressure in recent months as it became clear growth stalled in the second quarter and house prices were going backwards again. Without structural reforms to boost growth, the Government is now reliant on the short term proof of growth in the economy. Given its initial freezing of Government capital expenditure on transport, hospitals, housing and water infrastructure in late 2023 and early 2024, it has put all the pressure on a Reserve Bank monetary policy easing to achieve that growth. When the growth didn’t arrive, the pressure had to ramp up.The first fruit of this pressure was the bank’s decision last month to water down the Adrian Orr-created toughening of capital requirements. The changes mean that over the next two years the big four banks will have the ability, if they want to, to engineer an extra $175 billion worth of bank lending into the housing market.Now keep an eye on the LVRs and DTIsThe next avenue for Beehive activism is likely to be around the LVRs, which the previous National Government opposed and were the reason they subsequently refused to re-appoint their creator, then-Reserve Bank Governor Graeme Wheeler. Willis reluctantly agreed early in her term as Finance Minister to Orr’s proposal for a DTI, which was subsequently imposed from July 1 last year. Both the LVRs and the DTIs are now in the firing line.One of Willis’ most significant actions around the Reserve Bank this year was the appointment of former Reserve Bank Deputy Governor and Acting Governor Grant Spencer as a director of the board on July 1. Spencer’s most significant move in his short period in charge was his November 2017 decision to loosen the LVR restrictions.Spencer is the strongest candidate to be the new Chair of the board.Quote of the day: ‘No more 4D chess’‘Cut the spin and stop trying to play 4D chess. It isn’t working. The Reserve Bank board and Willis have engaged in what looks like a cover-up of the circumstances surrounding Adrian Orr’s resignation as Governor in March.’ Jenee Tibshraeny for NZ Herald-$ (gift link): Cut the spin, Nicola Willis and Reserve BankNumber of the day: Nine Nine years - Neil Quigley was Reserve Bank Chair for nine years until resigning with immedate effect last Friday night. Nicola Willis then went on to give interviews over the next day saying she would have sacked him if he hadn’t resigned.Chart of the day: Governments fall when house prices fallTimeline-cleansing nature-picKa kite anoBernard This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

The Government just administered an inflation shock

Briefly in this deep-dive below on the political economy of administered inflation below:* The Government was elected in 2023 on a wave of public revulsion at inflation, which voters blamed on the then-Labour Government. Initially, inflation fell through 2024 because global oil and food prices had fallen in the previous 18 months. But it has come surging back in 2025, thanks to another burst of global food price inflation and a surprising cascade of new and higher Government and council fees, fines, rates and charges. * This administered inflation is immune to higher interest rates and was caused by the Government’s late-2023 decision to cut capital spending and budget deficits in order to take pressure off inflation and mortgage rates. Instead, this ‘belt-tightening’ created the exact opposite of reducing inflation. Imposing new fees and rates on consumers to replace Government-funded capital investment has added the worst surge in administered inflation in 35 years, as the Reserve Bank pointed out in its Monetary Policy Statement last month (Chart 2.16, Page 20). The chart is below.* Now the public have noticed the latest inflation surge too and have started blaming the National-led Government for it, to the extent of telling Ipsos NZ in a poll published over the weekend that they trust Labour more than National on the cost-of-living/inflation issue (Page 18). The chart is below.* But this is just the beginning. A whole raft of new entrance fees, road tolls, congestion charges, water charges, road user charges, user-pays levies, fines are set to be imposed in the coming years as the Government sticks to its strategy of replacing debt-funded public investment with private-funded investment that is serviced by user pays charges. In effect, this is a systemic inflation shock administered by a Government that is pursuing an ideology of reducing the size of the state below 30% of GDP (from around 35% now), and getting its own measure of net debt bending back down towards 30% (from around 42% now).* The problem for the Reserve Bank is that it can’t easily ignore this systemic shock and let inflation run higher than its target, so it will have keep interest rates as much as 150 basis points higher than it would have without the shock. That’s partly the Reserve Bank’s own fault. It decided to ignore capital costs in its measures of inflation when it was set up as independent inflation-targeting central bank because it created a risk of a feedback loop that meant higher interest rates generated higher inflation, forcing interest rates to go even higher. * For example, our Consumer Price Index (CPI) measures don’t include mortgage, business or Government interest costs. But these still-ignored costs are now turning into a CPI inflation shock that is definitely not ignored because central Government fees and charges and council rates are included in the CPI.* In turn, this raises questions about whether the Reserve Bank can avoid running interest rates tighter than necessary and in a way that forces it to raise unemployment to compensate for a structural and ideological decision by the Government. Workers who lose their jobs because of Government cutbacks would be then doubly punished with higher interest rates and an even harder job-hunting task because of the way the Reserve Bank Act forces the Reserve Bank to prioritise CPI inflation of around 2%.I have published this email, video and podcast to the public fully and immediately. This work I do in the public interest is only possible with the help of paying subscribers. So please subscribe to support this work. Paying subscribers get access to our chat channel and can comment on articles. They also get exclusive access to webinars and some articles.The Government administered an inflation shockA passing comment about the need for higher prices from Air NZ CEO Greg Foran in an interview with Lisa Owen on RNZ Checkpoint on Thursday night emphasised to me again just how much of our economy is driven by administered prices from central and local government, regulated businesses and monopolies, rather than prices being decided by the forces of supply and demand in a free market that the Reserve Bank is tasked with controlling and assumes.Foran said passengers should expect fare increases of at least 5% in the coming year because the airline’s costs had increased. Not fuel costs, which have fallen 12%, but equipment, labour and landing charges, he said.“Airport charges over the last five years, and I'm talking all airports here, are up 55%. So that's double the rate of CPI. They're up another 6% this year. That means we will spend $417 million on airports this year. It's our fourth most expensive cost line in the business. I can't absorb those costs. When you get on a flight to go from, say, Auckland to Wellington, and let's say you happen to do get a good fare and that fare's $100, about $62 of that is simply to pay for landing charges in Auckland and Wellington.I think Air New Zealand is going to have to look at moving fares up by at least 5% so that we can continue to invest in this business and ensure that it's safe and resilient.” Air NZ CEO Greg Foran via RNZ CheckpointAside from questions about how much competition there is in domestic aviation and that landing charges are administered and based on estimates of capital investment costs and higher capital returns, Foran’s mention of landing charges reminded me of this January 17 announcement that most missed from the Civil Aviation Authority. It announced it would increase domestic passenger landing fees by 146% and its domestic security fee by 66% from July 1. It increased international fees by 70% and other fees by 10%. This was to reduce the Government’s effective subsidy for Civil Aviation built up since 2017 and through Covid. The fee increases meant the Government would have to borrow $51 million less over the next three years.That made sense for a Government hoping to reduce interest costs by a basis point or two because of less borrowing. The problem is that capital management decision is now turning up in the Consumer Price Index, which the Reserve Bank has to react to with higher interest rates than would otherwise be the case.This is just the latest case of that capital expenditure and debt reduction decision flowing into higher consumer prices, including:* road user charges for electric vehicles to reduce borrowing for road repairs;* a $50 hike in car, motorbike and trailer registration fees to reduce borrowing for new roads by $530 million;* hikes in fuel taxes by 22 cents a litre by the end of the 2029 parliamentary term to reduce borrowing costs for roads;* a 14.8% increase in passport renewal fees from May 1 this year;* an almost trebling of the international visitor levy to $100 from October 1 last year;* Increases in court and legal fees across the board by the Ministry of Justice;* increases in work and residency visa fees of up to 256% from October 1 last year;* increases in customs fees to reduce borrowing by $70 million from July 1 this year; and,* a tertiary education fees increase of 6% for calendar 2025, treble the 2% midpoint of the Reserve Bank’s 1-3% target range. These are just the ones I could recall and find this morning. I welcome your additions in the comments below. This is how administered inflation cascades down. It is on track to get worse, with the Government planning to impose congestion charges and road user charges.Quotes of the day: ‘We’re worried about administered inflation’“Recent increases in food prices and administered prices have contributed to near-term inflationary pressure.“The Committee noted that increases in administered prices, such as local council rates and some energy charges, have contributed to higher-than-otherwise non-tradables inflation. Some (Monetary Policy Committee) members emphasised that these prices represent rising costs for businesses and may spill over to generalised non-tradables inflation, particularly in the near term.“Inflation in administered prices is contributing significantly to non‑tradables inflation, and at 10.8 percent in the year to the June 2025 quarter is at its highest level since at least 1990. “We expect administered price inflation to ease over time in line with lower general inflation, but inflation in this category may remain higher than other non‑tradables categories for some time.” The Reserve Bank in its Monetary Policy Statement last month.Numbers of the day: 10.8%, 12.2% & 8.4%* 10.8% is the annual rate of administered inflation in central and local government fees and charges in the year to the end of June.* 12.2% is the annual rate of inflation of local authority rates and payments. Councils have blamed freezes in capital grants by the Government for transport, water and housing for their rates increases over the last year. * 8.4% is the annual rate of inflation of electricity prices, which are administered by the three state-controlled gentailers (Meridian, Genesis & Mercury) and Contact, along with lines companies who have prices regulated by the Commerce Commission, which takes into account higher interest costs and extra capital investment.Charts of the day: Administered inflation is not popularTimeline-cleansing nature pic: Exposed rootsKa kite ano. Bernard This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

RBNZ says it remains 'fiercely independent'

Just briefly, RBNZ Chief Economist Paul Conway talks in the interview above about the central bank's meetings with politicians and how it remains "fiercely independent." Governments that interfere in monetary policy get higher inflation, he said.Also, Conway said:* The RBNZ was doing a ‘mini-review’ of whether it should have taken a more moderate approach to hiking interest rates in the current cycle, similar to that adopted by the Reserve Bank of Australia, which hiked 425 basis points in 2022 and 20223, while the RBNZ hiked 525 basis points between late 2021 and May 2023;* He thought it was time for New Zealand to debate how to grow its economy in ways other than just increasing house prices;* He thought the best way to grow the economy more sustainably was to improve productivity by investing more, connecting better internationally and improving domestic competition; and,* the Monetary Policy Committee considered the potential long-term scarring effects on GDP growth and productivity from having a big output gap with higher unemployment for too long.This interview and article is fully and immediately available to all subscribers and the public. I welcome new full paying subscribers to allow me to keep doing this work in the public interest.‘We’re fiercely independent. And meddling just means higher inflation’I interviewed Reserve Bank Chief Economist Paul Conway this week about last week’s 25 basis point rate cut decision and the bank’s latest quarterly Monetary Policy Statement. Before our pre-arranged interview, PM Christopher Luxon said he had told Reserve Bank officials in a meeting before the decision that he wanted more rate cuts. He agreed with his interviewer Mike Hosking’s statement that the bank had been too slow. Luxon was then criticised for expressing an opinion in public that might damage perceptions the Reserve Bank was independent.“It's very clear in the literature. If you look at central banks that do get exposed to political pressure, inflation's higher in those countries.” Paul ConwayI asked Paul about that risk at the 7:44 mark. Here’s the transcript of that part of the interview (bolding mine): Bernard Hickey: In that political economy space, in the last few years all around the world, but also a little bit in Aotearoa, there's been some debate about Reserve Bank independence. Politicians from both sides have said things in the last couple of years. How is the landscape at the moment on Reserve Bank independence? Does the Reserve Bank feel independent? Does it feel like anyone's stepped out of their lane?Paul Conway: There's been a bit of talk the last couple of days in our country on this topic of Reserve Bank independence. I go to meetings with the Minister of Finance and the Prime Minister a couple of days before we make a decision. Absolutely, we are independent. We are not influenced by either the Minister of Finance or the Prime Minister in terms of our OCR decisions. We do kick around the economy. We learn from them what they're seeing and they sort of learn from us. We don't explicitly talk about what we are going to do with the official cash rate. Firstly, the Monetary Policy Committee hasn't decided what we're going to do at that date. And secondly, we're fiercely independent. We guard our monetary policy independence. And the reason that we do that is if we do have politicians setting interest rates — we call it the time inconsistency problem — they tend to juice growth around elections. It's just the fact of human nature. And it's very clear in the literature. If you look at central banks that do get exposed to political pressure, inflation's higher in those countries. So categorically, we are independent. Monetary policy is independent, and we are not influenced by the politicians when it comes to setting the official cash rate.‘Should we have hiked by less, as the RBA did? We’re checking’I then asked if the Reserve Bank had hiked too early and too much in 2021, 2022 and 2023, and had cut too little in 2024 and 2025. Here’s the full transcript from that exchange starting at the 15 second mark (bolding mine):Bernard Hickey: We've just had the Reserve Bank's monetary policy decision, a 25 basis point cut. We've now seen the Reserve Bank cut the official cash rate 2.5 percentage points in the last year and a bit. Do you think the Reserve Bank, in retrospect, put up interest rates too much in 2021 and 2022 and then hasn't cut them enough in the last year or so?Paul Conway: Retrospect is an important word there. The other thing I'll say on that is it takes a long time to sort of figure out a good articulate answer to that type of question. So we do our RAFIMP (Review and Assessment of the Formulation and Implementation of Monetary Policy) every five years (the next one isn’t due until 2027). We're sort of doing a mini RAFIMP at the moment and we'll be publishing a lot in that space. I think the other really important aspect when answering that question is what's our mandate? We are the people that try to maintain low and stable inflation. So you really have to come at it from that perspective. And I would argue with inflation of 2.7% in the second quarter, we're looking at hitting 3% in the third quarter, so upper end of the target band, we understand why. Inflation is up there and we do expect it to fall, but we expect it to fall back towards the midpoint of the target. So there's no hint of inflation sort of going south of 2%, much less out the bottom end of the target. So assessed from that perspective, even though I'm sort of saying it's a bit too early, there's a definitive sort of answer to that question. We think we're achieving our mandate and monetary policy settings over the last couple of years have been consistent with that. Let's chat about this again in the future when we've been through the full cycle. We obviously want to learn from these types of things. So let's chat about this again, these types of things and how we did compared to the RBA, which took a slightly different approach. There's some really interesting questions in there and we need to come to a really good landing on all of those questions so that we get even better at monetary policy going forward.‘Maybe we should invest in productivity, rather than house prices’I also asked about the Reserve Bank’s comments in its MPS around housing wealth and its connection to consumer spending, and then about whether the economy could grow in the long run without rising housing wealth and a rising population. “It has been house price inflation and strong population growth through migration have been key drivers of economic growth in this economy for a long time.” Paul ConwayHere’s a couple of charts from Pages 35 and 36 of the MPS.Here’s the transcript of that exchange from the 2:50 mark (bolding mine):Bernard Hickey: In the monetary policy statement and then in the discussion in the news conference after the decision, there was quite a focus on the role of wealth and the wealth effect on consumers in Aotearoa. Can New Zealand's economy grow when house prices are flat or falling?Paul Conway: Yeah, that's a really good question as well. And if you look at the correlation with house price changes, house price cycles, and if you compare that to the consumption cycle or the residential investment cycle, they're very close to each other. And that wealth effect coming through the housing market, it has been a source of growth, a growth engine, if I can use the term pretty lightly.It has been house price inflation and strong population growth through migration have been key drivers of economic growth in this economy for a long time. We're talking decades here and for a few reasons it doesn't look like it's going to be the same going forward. I think we have made progress on the supply side of the housing market. There's been reasonable progress there, so that when we get an increase in demand for houses, we get more houses instead of just getting more expensive houses. So I think it's a really interesting time in New Zealand's economic history. Can we sort of kick on from here? How do we spark this economy up without relying on house price inflation? Because of course the problem of sort of selling houses amongst ourselves at ever-increasing prices, pretending that we're creating prosperity, is important.If you've got a house you're doing great And if you don't you're not and then your kids come along and they want a house and all of a sudden they cost a million dollars.I do not subscribe to the view that the only way to sort of lift growth in this economy has to come through ever increasing house prices. I think it's time for us to really have the conversation on how do we grow in other ways, which as you know from my perspective is through productivity enhancements. (In a previous role Paul was the chief economist for the now-disbanded Productivity Commission) That's how a sort of normal developed economy would do it going forward and I think that's what we need to aim for.Bernard Hickey: So the Reserve Bank obviously sort of runs the machine (the economy) rather than builds the machine or repairs the machine. So what sort of repairs would the machine need from your point of view?Paul Conway: I think it's really important here to say what is the role of monetary policy in economic growth. The literature on that's very clear that the best contribution that we as the nation's central bank can make to our long-run economic performance is maintaining low and stable inflation. We are the people that moderate the business cycle so that we can keep inflation well anchored within that 1 to 3 % target with a focus on the midpoint. So that's all we do basically in terms of monetary policy. So we're forecasting a recovery in the economy from the third quarter of this year. And what we're talking about there is what we call the output gap closing. So the business cycle sort of turning and it's not a spectacular sort of recovery and growth. It's just an uptick in the business cycle and that's all that we can affect. If we want more impressive long run growth rates, that's not monetary policy. That's regulatory policy. It's tax. It's other bits of government policy. There's no secret sauce about how we do that. I run the risk of being told to stick to my knitting and stay in my lane when I talk outside of monetary policy, that's fair actually, we don't want people knitting while they're driving. So I hear that. But it's not a secret sauce how to improve our long run structural growth. It's about investing more. It's about connecting better internationally. It's about competing harder domestically. It's about doing innovation smarter. I would actually argue, Bernard, that we know what to do, but are we up for the conversation and are we up for the challenge of just getting on and doing it? And can I just be very clear: this is not a critique of the current government because we've had these issues for decades going back into the past.But does monetary policy actually hurt productivity & scar the economy?I also asked Paul Conway about a debate that has arisen in Australia in recent months about whether central banks actually further reduce productivity growth by hiking interest rates to offset the inflationary effects of low productivity growth. Last week Westpac Group Chief Economist Luci Ellis wrote in this note about growing evidence tight monetary policy didn’t help productivity grow: it may actually harm it. “Until recently, it was assumed in many quarters that weak productivity growth meant that demand had to be constrained – by monetary and other policies – to match the weak growth in supply. What if we have it all backwards? A growing body of research suggests that tight monetary policy can in fact reduce long-run growth. Westpac Group Chief Economist (and former RBA Governor) Luci EllisHere’s the transcript of our discussion, starting at the 12:10 mark (bolding mine):Bernard Hickey: In Australia, there's been some interesting debates about productivity. Whether monetary policy, which generally is assumed to be independent from the engine rebuilding process, whether actually monetary policy, raising interest rates, can have a scarring effect to reduce productivity growth, because it's not so easy to borrow money to buy new machines or retrain staff and we all know about the scarring effect when you have higher unemployment. So is it possible that the Reserve Bank makes it more difficult to improve productivity with the way it runs monetary policy?Paul Conway: I think these are interesting questions. So the idea if, for example, monetary conditions are restrictive, that's going to slow investment in the economy, which will equal a lower capital stock going forward, which can detract from what we call potential output growth. Or there's literature around suggesting that monetary policy type financial conditions again can reduce innovation in an economy. Normally we think of monetary policy influencing demand in the economy. And regulatory settings, fiscal settings, have more of an impact on the supply side of the economy. But I do think there is potential for hysteresis or these scarring effects. If you read the record of the meeting from our monetary policy decision last week carefully, we actually talk about it a bit in there, and at the margin, and I would argue it is just at the margin, there is a sense among the Monetary Policy Committee: we've had a negative output gap for some time; it sort of just keeps getting kicked into the future.When’s that going to start to recover? And it's a concern. What sort of scarring effects, if any, that might have on the supply side of the economy. That was one of the many factors that went into the change in tone, more assertive approach, to interest rate easing that the committee did last week.The section of the Monetary Policy Committee’s (MPC) record of meeting that Conway was referring to is here:The Committee discussed slow growth in the productive capacity of New Zealand’s economy. Potential output growth has slowed, reflecting subdued investment, low productivity growth, and historically low population growth through net immigration. The Committee noted that appropriate monetary policy settings would support sustainable long-run investment and growth. MPC record of meeting in August MPS (page 4)Conway is a member of the MPC.Ka kite anoBernard This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe