Caution advised on monetary policy changes

September 12, 2007
Media release

Caution advised on monetary policy changes

Practical things can be done to ease inflationary pressures, Business NZ Chief Executive Phil O’Reilly advised the Finance & Expenditure Select Committee this morning.

Speaking to the committee’s Inquiry into Monetary Policy, Mr O’Reilly said there was no one silver bullet to slay inflation, but many ways in which the environment for business could be improved to reduce inflationary pressures.

He said effective policy solutions should ensure that markets are competitive, the regulatory burden is not too oppressive, and Government expenditure is constrained.

Issues surrounding land availability and housing supply warrant further consideration, he said.

“Strong productivity growth is also important in the context of monetary policy settings - it can create significant rises in real incomes without imposing inflationary costs on the economy.

“The Government should think carefully before pursuing major changes to monetary policy. New Zealand’s monetary policy framework has served the country well.

“The recent fall in the dollar shows the market corrects faster than what can be achieved through regulation.”

Mr O’Reilly said New Zealand’s monetary regime was the envy of other countries, with the Reserve Bank Act providing for independence from government intervention, ensuring transparency in monetary policy settings.

Fundamental changes to the Reserve Bank Act had potential for adverse consequences, he said.

“We want to jealously guard the Reserve Bank’s independence and international credibility.

“Undermining the objective of monetary policy by focussing on multiple objectives for the Reserve Bank would create confusion and reduce business confidence in the Reserve Bank.”

Business NZ supports the Inquiry and has contributed to debate through its recent publication: ‘OCR: The Sharpest Tool in the Box? – Giving interest rates some help to control inflation’.

This explores possible measures to support the official cash rate as the bank’s chief monetary tool. A copy can be downloaded from www.businessnz.org.nz

ENDS

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