Behind the thinking behind the RBNZ rate hike - Tue 8 Sep

0:00Now just as the US Federal Reserve chair adopts a policy of saying less our reserve bank wants you to hear more from the people who set the cash rate. Of course they hyped at 25 basis points to 2.75 last week. Yesterday, our BNZ Manitory Policy Committee member Prasanna Guy agreed to an interview to discuss that decision. He's voted to hike in all three of the decisions published since the NPC started naming names and started by asking him, what does he see as the greater risk that the recovery stalls or that higher inflation expectations become more embedded? There are two sides to this coin. The risks of inflation are, if you like, in the short term, more front-learded because the shocks of whalmers have really increased import costs directly and indirectly for firms. And there's a risk that those firms might raise their prices by a little bit more than some of these costs warrant. So that's upfront.

1:00But a slightly slower pace, you have the possibility that too much of the shock and monetary tightening could slow down the economy at this point in time. So that's slightly longer fused. The economy is recovering and we have had a long period stimulus and that's slowly being withdrawn with this latest measure. So it's a fine balance between short-term inflationary pressures and ensuring that the economy continues to roll forwards with appropriate momentum. So you've been on the committee now for two years. Have you seen a change in that time or observed from the position you're in, both as a policy maker as well as someone who interprets what's going on in the economy, I suppose, and how firms respond in these situations or is it pretty much conforming to the view you'd

2:04formed from your many years of research and other central bank experience? I think firms do conform. I don't think they change hugely. So the shocks are different and the way in which they respond is slightly different from occasion to occasion. So prior shocks like COVID would have been firms that have responded very differently. A shock like Hormuz, they respond slightly differently, but the principles remain the same. So the job of the central bank is at least as much to steer those behaviors as well as it can from a distance. That's what it tries to do. Sure. Can you talk a little bit about, I guess, it's a bit of an experiment, isn't it, an openness? How do you feel about the idea that you're sort of speaking more openly about some of the decisions that you make inside the committee or that your views are being represented distinct

3:06from a consensus view? I think it is quite a good thing. I think it's important that policymakers are accountable and we're not murky figures hidden behind some kind of papal conclave. So I think that's very important for accountability, no less. And it's important to demonstrate that there is diversity of opinion. Sometimes that opinion will diverge. And that's a healthy thing. You can't expect six or seven people to be in a room and all agree in a violent fashion. So I think it's a good thing. The public then understands. Berms, decision makers in the economy understand what is going on, why it's going on. And I think that's on the whole, a very good thing.

4:07I'm sure your position just happens in the last three decisions that have been more open like there has been consistent though. Does that, how do you feel comfortable being reflected as a bit of a hawk as a result for being person? In the last three, let's hike. Let's hike. Let's hike it if you're opportunity. It's something I'm entirely comfortable with. And I think the first thing to say is that the committee room is not in Avery. There are no hawks, there are no devs. We read what we see in front of us. I think if you'd ask me this question nine months ago, you'd be saying you'd be attributing a different bird to me because we were cutting then and we were cutting in some cases by as much as 50 basis points. And I was on record at the time as saying that we had to be very conscious that the economy was falling into something called an uncertainty trap because people were being overly cautious. And so one of the reasons for wanting some stimulus was to actually encourage the economy

5:15to recover and to kickstart that behavior which was perhaps overly cautious. So I think as circumstances change, your voting pattern will also move with it. And so the fact that I come across as one or another is a function of what's going on around us. Just a last question then before we go. Neutral rate, where are we at with that? Where is your personal view there on where that sits at the moment? So the neutral rate is quite a huge variance. There's a hypothetical concept after all. There is no such thing as neutral. But broadly speaking, it sort of lies anywhere between two and four. And there is a bank that's kind of articulated where it thinks it's sort of central estimate

6:16of that is. I have in the past said, or quite recently said, that because of the hallmouse shock, the destruction of infrastructure and the huge investments that are required globally mean that world interest rates are going to rise. And that pushes up neutral a little bit. But how much buy or does that take us beyond that band of 2% to 4% is an open question. So I think it's one of those concepts where you can't quite pin it down. So you just sort of know that you're operating in that in the zone, if you like. And that could be, we could be quite close to it. Or we could be some little way away from it at the moment. That was our BNZ monetary policy committee member, Prasanna Guy. He was also a special advisor to Mark Coney.