Brash clear on where the buck stops

By BRIAN FALLOW

Reserve Bank Governor Dr Don Brash yesterday defended the substantial shift in his monetary policy stance over the past two months.

He quoted a retort by renowned British economist John Maynard Keynes, "When the facts change, I change my mind - what do you do, sir?"

Dr Brash said that at the time of the last monetary policy statement, on December 6 it had still seemed likely the economies of New Zealand's main trading partners would remain reasonably robust this year.

The New Zealand dollar was near an all-time low, petrol prices were high and business confidence had recovered strongly.

"It seemed entirely appropriate to signal the likelihood that, if those circumstances continued, some increase in the official cash rate would be needed in the first few months of this year."

Since then, evidence had accumulated that the United States, and possibly the Australian economies, were slowing quite rapidly, the dollar had appreciated significantly and petrol prices had fallen, suggesting the spike in headline inflation would be briefer than had been earlier expected.

He said these facts supported this week's decision to leave interest rates unchanged.

But that did not mean the bank was wrong in December, he told those attending his annual speech to the Canterbury Chamber of Commerce.

Afterwards, he said some market commentators had taken his statement this week as indicating that he was leaving his options open and that was the impression he had wanted to convey.

Dr Brash devoted most of his speech to detailing the quarterly process by which monetary policy is set and making the point that while it was his decision alone, it was not one he reached unaided.

The single-decision-maker model was chosen in 1989 to heighten the sense of accountability felt by the Governor for monetary policy decisions, he said.

Whether it should continue would be one of the main issues addressed by the independent review the Government has commissioned of the bank's operations by Professor Lars Svensson.

Professor Svensson's report should be made public within the next few weeks.

The forecasting process involves not only analysing a continual, if sometimes belated flow of statistical data, but the gathering of anecdotal evidence by visiting companies, as a cross-check.

Forty or 50 firms were visited each quarter, drawn from a pool of around 400.

Reserve Bank economists not directly involved in the forecasting process were asked to present both a hawkish and a dovish analysis of the economic situation.

"This is to lower the risk that we fall quickly into a single view of the emerging situation and lapse quickly into a presumed policy decision."

The crunch meeting of Dr Brash and seven senior bank staffers on what change, if any, should be made to the official cash rate, and what future track interest rates will take, is held 2 1/2 weeks before the monetary policy statement is released, although Dr Brash is able to change its view up to the day of the announcement, should there be some surprise development.

But no vote was taken and the decision rested with the Governor alone.