Monetary policy matters
2 February 2012
A change in the Reserve Bank Governor provides an ideal catalyst to change the Policy Targets Agreement between the
Reserve Bank and the Government, say the New Zealand Manufacturers and Exporters Association (NZMEA). Bill English
commented yesterday that monetary policy was not important as inflation pressures are low, but monetary policy is still
vital to an improved performance from the traded sector.
English commented that:
“the issue now isn’t monetary policy, it’s been quite accommodating. The issue is building confidence and building
investment”;
And:
“There are a whole lot of other issues that are much more important around productivity, around getting our resources
into the tradable sector, around building investment, getting Christchurch rebuilt”.
NZMEA Chief Executive John Walley says, “To suggest that monetary policy is not an issue when we are seeing 30 to 40
percent swings in the Trade Weighted Index is absurd. The best way to get more investment and growth into the tradable
sector and lift productivity would be to sort out the exchange rate.”
“English himself regularly presents this graph showing the tradable sector in decline since 2004.”
“Monetary policy is the biggest cause of this decline.”
“Over Dr Alan Bollard’s time as Governor we have seen severe damage to the traded economy, partly due to mismanagement
of the current system, and partly due to a reluctance to use alternatives to the Official Cash Rate to support
exporters.”
“Over time an elevated exchange rate strangles investment in the traded sector; that low investment inevitably leads to
low productivity, contraction and failure, particularly for the high value added sector.”
There are three questions the Government need to consider before agreeing to a new Policy Targets Agreement:
• Does the Governor continue to make decisions or do we use a committee?
• Should inflation remain the only target of the RBNZ?
• Should macro-prudential tools in addition to interest rates be used by the RBNZ?
“There is a strong case for a change on all three points,” says Mr Walley. “The biggest barrier to export growth is an
overvalued and volatile exchange rate; changes to the Policy Targets Agreement must be part of this solution.”
ENDS