11 April 2006
Wood Processors Support RBNZ-Treasury Mortgage Levy Proposal
New Zealand Wood Processors Association (WPA), representing the majority of timber, panel and pulp production in New
Zealand, has come out in support of the Reserve Bank/Treasury mortgage levy proposal to the Minister of Finance, as part
of the Supplementary Stabilisation Instruments Report into monetary policy alternatives.
“Excessively high exchange rates have been undermining the forestry industry, exporters and the whole economy’s
international competitiveness,” says Peter Bodeker, CEO of WPA. Combined with that is that much of the cost of high
internal interest rates paid by New Zealanders is paid to foreign owned banks. Any monetary instrument that separates
the linkage between interest rates and exchange rates will be welcomed”
Recently the Board of WPA supported a proposal to seek changes to that current monetary policy which sees interest rates
used as a way of maintaining inflation but has the effect of increasing the exchange rate. Specifically it supported
further development and discussion of the Interest Linked Savings Scheme proposed by Phil Verry
For some time, Phil Verry, executive chairman of Red Stag Timber Limited, the company operating New Zealand’s largest
sawmill, Waipa Mill, has been promoting an Interest Linked Savings Scheme he has designed. He says it is encouraging to
see the RBNZ and Treasury signaling a need to consider innovative solutions to meet the special challenges posed by New
Zealand’s unique economic circumstances.
“Monetary policy is supposedly designed so that in times of inflation higher interest rates will damper demand and
reward saving with those savings retained within the economy. However, the internationalisation of finance markets,
coupled with New Zealand’s low saving rate, means that when traditional monetary policy is applied in the domestic
economy, New Zealander’s wealth is permanently gifted away to foreigners through the Reserve Bank’s higher interest
rates”, Verry says.
“Consequently, in effect New Zealanders then have to borrow back as debt the wealth they have gifted to foreign owned
banks, to fund the resulting current account deficit and pay interest on the additional borrowing. This wealth leakage
is a major reason why the country now struggles to keep up in OECD rankings and why Kiwis have lower incomes, low
savings, high national debt, and consequently cannot afford important services like health, roading and policing”.
“If that is not bad enough, foreigners attracted by the excessively high returns from lending to New Zealand due to
present Reserve Bank policy, have been buying up the New Zealand dollar to lend to Kiwi borrowers, which has overvalued
the New Zealand dollar. This has damaged the profitability of the export sector, which is now only one-half of the size
New Zealand needs it to be, and therefore damages the whole economy”
Verry says the Reserve Bank’s high interest rate policy has caused the high inflation of house prices – which has become
the main cause of Reserve Bank angst – so the official cash rate is now an entirely destructive instrument for the
operation of monetary policy.
“There are few, if any, countries with this set of economic vulnerabilities, which explains why the interest-linked
savings scheme approach has yet to be adopted internationally”, says Verry.
Verry says the RBNZ/Treasury is yet to factor in the full effect of implementing such an economic growth management
tool. He is confident that after further economic modeling, the interest-linked savings scheme would be used instead of
the OCR, in the future, to create a high growth high wealth low inflation economy with low foreign debt.
He is proposing the further scoping and modeling of his interest-linked savings scheme proposal, by an independent
taskforce of experts, with Reserve Bank and Treasury participation.
Bodeker says any issues raised around compliance and setting of the levy appear to be relatively small and easily
surmountable, compared to the large positive outcomes achievable for the whole economy. WPA will be contacting other
exporter associations and corporates to build united support for the economic modeling and presentation to government of
the interest-linked savings scheme approach for improved monetary policy.
ENDS