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Wood Processors Support Mortgage Levy Proposal

11 April 2006

Wood Processors Support RBNZ-Treasury Mortgage Levy Proposal

New Zealand Wood Processors Association (WPA), representing the majority of timber, panel and pulp production in New Zealand, has come out in support of the Reserve Bank/Treasury mortgage levy proposal to the Minister of Finance, as part of the Supplementary Stabilisation Instruments Report into monetary policy alternatives.

“Excessively high exchange rates have been undermining the forestry industry, exporters and the whole economy’s international competitiveness,” says Peter Bodeker, CEO of WPA. Combined with that is that much of the cost of high internal interest rates paid by New Zealanders is paid to foreign owned banks. Any monetary instrument that separates the linkage between interest rates and exchange rates will be welcomed”

Recently the Board of WPA supported a proposal to seek changes to that current monetary policy which sees interest rates used as a way of maintaining inflation but has the effect of increasing the exchange rate. Specifically it supported further development and discussion of the Interest Linked Savings Scheme proposed by Phil Verry

For some time, Phil Verry, executive chairman of Red Stag Timber Limited, the company operating New Zealand’s largest sawmill, Waipa Mill, has been promoting an Interest Linked Savings Scheme he has designed. He says it is encouraging to see the RBNZ and Treasury signaling a need to consider innovative solutions to meet the special challenges posed by New Zealand’s unique economic circumstances.

“Monetary policy is supposedly designed so that in times of inflation higher interest rates will damper demand and reward saving with those savings retained within the economy. However, the internationalisation of finance markets, coupled with New Zealand’s low saving rate, means that when traditional monetary policy is applied in the domestic economy, New Zealander’s wealth is permanently gifted away to foreigners through the Reserve Bank’s higher interest rates”, Verry says.

“Consequently, in effect New Zealanders then have to borrow back as debt the wealth they have gifted to foreign owned banks, to fund the resulting current account deficit and pay interest on the additional borrowing. This wealth leakage is a major reason why the country now struggles to keep up in OECD rankings and why Kiwis have lower incomes, low savings, high national debt, and consequently cannot afford important services like health, roading and policing”.

“If that is not bad enough, foreigners attracted by the excessively high returns from lending to New Zealand due to present Reserve Bank policy, have been buying up the New Zealand dollar to lend to Kiwi borrowers, which has overvalued the New Zealand dollar. This has damaged the profitability of the export sector, which is now only one-half of the size New Zealand needs it to be, and therefore damages the whole economy”

Verry says the Reserve Bank’s high interest rate policy has caused the high inflation of house prices – which has become the main cause of Reserve Bank angst – so the official cash rate is now an entirely destructive instrument for the operation of monetary policy.

“There are few, if any, countries with this set of economic vulnerabilities, which explains why the interest-linked savings scheme approach has yet to be adopted internationally”, says Verry.

Verry says the RBNZ/Treasury is yet to factor in the full effect of implementing such an economic growth management tool. He is confident that after further economic modeling, the interest-linked savings scheme would be used instead of the OCR, in the future, to create a high growth high wealth low inflation economy with low foreign debt.

He is proposing the further scoping and modeling of his interest-linked savings scheme proposal, by an independent taskforce of experts, with Reserve Bank and Treasury participation.

Bodeker says any issues raised around compliance and setting of the levy appear to be relatively small and easily surmountable, compared to the large positive outcomes achievable for the whole economy. WPA will be contacting other exporter associations and corporates to build united support for the economic modeling and presentation to government of the interest-linked savings scheme approach for improved monetary policy.


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