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Caution on Reserve Bank policy proposals

29 April 2014

Caution on Reserve Bank policy proposals

BusinessNZ has expressed caution about proposed changes to monetary policy outlined by Labour today.

“Exporters will appreciate Labour’s attempt to come up with a policy that assists in bringing the dollar down to more sustainable levels, however they may have concerns about its workability in practice,” BusinessNZ Chief Executive Phil O’Reilly said.

The proposed policy would ‘mix the targets’, he said. Instead of a sole focus on inflation, the Reserve Bank would also have to focus on achieving a positive balance of payments, stable economic growth and stable employment. This raises the risk of not achieving some or all targets.

“New Zealand’s external balance is a result of a number of factors, including over-consumption, over-regulation and inefficient government spending. It’s hard to see how the Reserve Bank can be particularly influential in changing these.”

Mr O’Reilly said there was potential for uncertainty and confusion from having different levers over interest rates and KiwiSaver rates.

“While the Reserve Bank would apparently retain control over its existing interest rate lever, it would probably need to go to the Government for the power to use the KiwiSaver savings lever each time it sought to do so. This would not only slow down the Reserve Bank’s decision-making ability, but would undoubtedly introduce politics into the decision making process. All of this would potentially add a great deal of political uncertainty to New Zealand’s macroeconomic settings.

“New Zealand’s current Reserve Bank system is scrupulously apolitical. That is why other countries have followed our lead in monetary policy.

“Labour’s policy brings the risk of a future government politicising what has until now been an apolitical process.

“Can you imagine a future Government agreeing to a Reserve Bank recommendation to raise KiwiSaver rates three months before an election? “ Mr O’Reilly asked.

He said restricting immigration numbers as a way to reduce house prices could have negative consequences, potentially leading to wage inflation and constraints on firms unable to gain the skills they need.

“The policy announced today makes little mention of the key role played by other government policies in reducing house prices and making our economy more competitive. We note for example the recent Productivity Commission report on housing affordability which pointed to the key role played by land supply constriction in increasing house prices. ”

There would also be more uncertainty about incomes as a result of the proposed policy, he said.

“Income earners would be uncertain as to whether or not their KiwiSaver or their mortgage rates might rise, or both. This would have impact on private sector wage setting.

“Labour’s proposed policy brings some creative ideas to the table and they are to be congratulated for doing so, however it also brings potential risks, and the lack of detail about how it would work in practice means business would not at this stage be able to give unqualified support to the ideas,” he said.

ENDS

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