Labour calls for monetary policy to expand goals beyond inflation control

Tuesday 23rd August 2016

The Reserve Bank of New Zealand should be allowed to target goals other than price stability, says the Labour Party finance spokesman, Grant Robertson.

His comments follow a speech today by RBNZ governor Graeme Wheeler in which Wheeler sought to answer critics who variously say he should stop lowering interest rates, lower them faster, or that inflation-targeting should no longer be the primary goal of the central bank's activities.

"The Reserve Bank’s struggles to meet its inflation target, the rising exchange rate and the continued housing crisis shows current monetary policy needs to be reviewed," said Robertson. At "a bare minimum", there should be changes to the Policy Targets Agreement between the government and the RBNZ, setting out the central bank's responsibilities.

Robertson took issue with Wheeler's ongoing support for inflation-targeting, saying although it was important, "the evidence is clear that this is not sufficient for monetary policy here or overseas to manage changing global economic conditions".

The PTA created an inflation target of between 1-and-3 percent, but "forecasts that the mid-point will not be reached for seven years seriously call into question the agreement," Roberston said. “Current interest rate settings are helping to push the dollar to nearly its highest point this year – hurting our hard-pressed exporters and slowing the economy. It is time to review monetary policy to ensure it is relevant in the modern world."

The world had changed hugely since the Reserve Bank Act came into force in 1989 and needed updating to "adapt to the ‘new normal’ of low inflation and stalled growth".

“A review needs to consider widening the focus of the bank to take factors such as the exchange rate, employment, wages and the overall health of the economy into account when setting the OCR and making its policy decisions."

Robertson has been arguing that, despite annual economic growth rates at around 3 percent and low unemployment by global standards, the Aug. 11 cut in the official cash rate to 2 percent was a "vote of no confidence" in the New Zealand economy.

New Zealand First leader Winston Peters, a perennial critic of inflation-targeting, weighed in too, saying Wheeler had "waved the white flag" by declaring the RBNZ had little capacity to control the exchange rate or inflation, relative to the impact of global events.

“The Reserve Bank has announced that they’re just a spectator when they ought to be a player,” he said. "What an admission.

"The primary function of the Reserve Bank Act must be broadened to include the rate of economic growth, export growth, the value of the dollar and employment, as well as, price stability," Peters said.

BusinessDesk.co.nz

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