The limitations of monetary policy

27 January 2009

The limitations of monetary policy become patently obvious

The sudden inflation drop in New Zealand and the inability of low interest rates around the world to support growth demonstrate the limitations of monetary policy say the New Zealand Manufacturers and Exporters Association (NZMEA). Other countries have rapidly moved into the new world order, slashed their interest rates, and are using heavyweight fiscal policy as a stimulus to deal with the impotence of monetary policy in a largely deflationary environment.

New Zealand's inflation rate has dropped to 3.4% largely due to lower fuel prices. This dramatic drop has lead to predictions that inflation will drop below one percent later in the year, meaning that inflation may only spend about six months in the target band.

NZMEA Chief Executive John Walley says, "An Official Cash Rate (OCR) of over 7% failed to suppress inflation, and in fact it was stoking inflation by attracting easy credit off the back of cheap foreign funds flowing into an overheated housing market. Right now the OCR is equally ineffective as rate cuts fail to stimulate any growth. It is surprising that there still appears to be no real will to find a better way."

"There is no doubt about the damage monetary policy, through volatile and massively overvalued exchange rates, can, has and will do to our exporters unless we find a better solution."

"The rest of the world has responded to the threat of deflation by slashing central bank rates close to zero, printing money and pouring it into the problem," says Mr. Walley.

"True to form the RBNZ has moved slowly, even claiming we are through the problem, or somehow insulated from the global economy. Contrary to these claims major action is needed."

"Short-term action: cut rates to match the rest of the world, which will take the speculative pressure of the exchange rate and pass on larger margins to our exporters. In addition, stimulate the economy through fiscal policy, and attach some lending and margin rules to bank deposit guarantees to ensure taxpayer money is not used to increase bank margins."

"Medium term action: look for, find and implement a better way to control inflation that does not decimate our export capability, such as the Interest Linked Savings Scheme."[i]

"We cannot afford to go through another cycle before making some significant systematic changes."

Members of the New Zealand Manufacturers and Exporters Association make nearly $2.0 billion in sales and have an export value of around $1.0 billion. Our organisation can trace its existence back to the early history of New Zealand.

As a legacy of the hard work and careful financial management of the past, we have a significant asset base that enables our independence and extends our activity. Subscriptions fund only a very small part of our current operating costs.

Membership is open to all manufacturers and exporters and others at the discretion of our Council. Enquiries should be directed to mea@mea.org.nz

ENDS

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