Partridge on Reserve Bank credibility

Roger Partridge writes:

Writing in the Journal of Monetary Economics in 2015, Boston University’s Professor Robert King assessed the value of central bank credibility empirically. A bank that has lost its credibility has to impose far greater costs on an economy than one with its credibility intact. A credible central bank’s retaliation against inflation does not also have to convince people that it is serious about fighting inflation. People already know it. That allows its response to be comparatively moderate. …

Recent survey data released by the Reserve Bank reveals just how much of a battering the Bank’s inflation-fighting credentials have taken. On 12 October, the Bank published the results of the first round of public consultation on its monetary policy remit review.
Survey respondents were asked how much confidence they had in the Reserve Bank to get inflation back within the target range of 1-3% by 2024. The respondents fell into two groups of “representative” and “self-selected” survey recipients. Of the respondents expressing a view, close to 60% of the representative and 70% of the self-selected groups said they had only “a little” confidence or were “not at all” confident in the Reserve Bank getting inflation back within the target range. Meanwhile, only a respective 23% and 28% of the two groups were “somewhat” or “extremely confident.”
The results suggest the Reserve Bank’s once fearsome reputation as an inflation fighter has been squandered.

This has real world consequences. If there was greater trust in the Reserve Bank, then you wouldn’t need to lift interest rates so much, and fewer people would lose their jobs (and homes). But 60% to 70% don’t think the Reserve Bank will get inflation down to under 3% by 2024.

This should come as no surprise. In combination, Orr and Robertson have beleaguered a once single-minded Reserve Bank with a raft of ancillary policy targets and diversions. Where once the Bank had a steely-eyed focus on price stability, its formal remit now includes maximum sustainable employment and house prices. And then there are the Bank’s other contemporary areas of focus, including inequality, climate change and Māori culture and language.

And the price for this lack of focus will ironically be more jobs lost.