Do Not Interfere with Monetary Policy Framework

Do Not Interfere with Monetary Policy Framework

The Reserve Bank's monetary policy framework including the Bank's independence and its single focus on price stability should be left alone. This is a key message contained in the New Zealand Chambers of Commerce submission on the Finance and Expenditure Committee's monetary policy inquiry submitted today.

"We caution against altering the monetary policy framework as a quick fix to increasing interest and exchange rates. This would address the symptoms rather than the cause of some fundamental problems facing the New Zealand economy," said Wellington Regional Chamber of Commerce CEO and NZCCI Director, Charles Finny.

"Undermining the Bank's focus on price stability by relaxing the inflation target would ultimately result in higher exchange and interest rates in the medium term.

"Giving the Bank additional targets would distract it from its primary focus of price stability. The best possible contribution that monetary policy can make to the economy is achieving low inflation.

"As well as being crucial for maintaining international competitiveness, low inflation is also the best way to maintain low interest and exchange rates in the medium term.

"Rather than change the monetary policy framework we need to address some of the policy settings which the Reserve Bank is having to lean against and implement policies which support monetary policy. It is these policy settings that are causing the inflation that the Reserve Bank is having to fight and it is therefore these factors that are the root cause of our overvalued currency.

"Our submission has proposed ten policy measures which if implemented would help contain inflation and take pressure off interest and exchange rates in the process. These include slowing the growth in government expenditure, enhancing New Zealand's competitive economic environment and encouraging the spread of migrant settlement throughout New Zealand. Our submission also makes the point that tax cuts are not inflationary when taken in the correct circumstances.

"There have already been significant adjustments to the monetary policy framework in recent years which have not resulted in better outcomes. Allowing higher inflation has not resulted in lower interest rates - if anything it has exacerbated the problem, and a further softening of the target would make things worse.

"Finally we are disturbed that the Minister of Finance has raised the prospect of the government interfering with the Reserve Bank's interest rate setting mechanism. Businesses want lower interest and exchange rates but undermining the Reserve Bank's independence and New Zealand's economic credibility is not the way to achieve this," Mr Finny concluded.

ENDS

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