Labour will clarify Reserve Bank’s authority

The Reserve Bank needs clearer legislative authority to allow it use prudential powers to support monetary policy, says Labour Associate Finance spokesperson David Parker.

David Parker told the New Zealand Manufacturers and Exporters Association this week that while the Reserve Bank had been making greater use of prudential supervision tools to support Monetary Policy, this had happened almost accidentally.

“The Reserve Bank Act needs to be clarified to ensure the bank can use such tools primarily for the purpose of supporting Monetary Policy,” David Parker said. “Labour will make that change. Faced with rapid credit expansion, such as that in recent years, the change would cause the Reserve Bank to use prudential ratios, rather than rely solely on interest rates.

“This would be better for the export sector. It would reduce the reliance of the Reserve Bank on interest rates (in itself a good outcome) while having a moderating effect on the exchange rate,” David Parker said.

David Parker told the association that a Labour government would also amend the Act to broaden its objectives, along the lines used in Australia. “This will require changes to the Policy Targets Agreement, including a requirement to consider explicitly the effects of monetary policy on exports.

“Labour acknowledges the crippling effect of high and volatile inflation. But it is at the very least arguable that the New Zealand prescription of monetary policy was applied in too draconian a fashion in terms of how high interest rates were pushed, and in too lax a fashion in terms of credit flows into New Zealand.

“New Zealand has a tendency for policy extremes. Other countries achieved control of inflation without interest rates staying higher than international averages over time.

“It is clear persistently high interest rates are imposing significant costs on our economy. New Zealand exporters are at a disadvantage against overseas competitors who are able to fund their activities at a lower cost, and foreign investors with access to cheaper capital have a distinct advantage over New Zealand borrowers forced to borrow at higher rates. How can this be in our national interest?

“Recent events have presented us with a new reality; a new environment in which the economic significance of our exporters has never been greater,” David Parker said. “We must earn our way in the world by selling more. Labour wants to rebalance the economy by improving the relative competitiveness of our export sector, both internally relative to other sectors and internationally relative to our competitors.“

David Parker said Labour would not undermine the independence of the Reserve Bank --- “we believe the bank should independently manage both financial stability and price stability” --- and would not go soft on inflation.

“This is why we’ve ruled out a wider target range for inflation. We know that inflation can have a devastating effect on the standard of living, especially for those Kiwis on a fixed income who struggle to have anything left over at the end of the week.”

ENDS

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