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Policy Game Changer?

Policy Game Changer? - 29 April

Today’s announcement by David Parker and the Labour Party if done well, might be a game changer, aligning monetary and fiscal policy to deal with the pressures that face our economy here and now, say the New Zealand Manufacturers and Exporters Association (NZMEA).

NZMEA Chief Executive John Walley says, “This is a big step, but it is something that has developed around the world. The days of one target (inflation), one lever (OCR) monetary policy are numbered; we now live in a complex world of multiple targets, and multiple levers – crucially this change fits the framework of other policies announced by Labour last week.”

“Targeting our external balance as well as inflation will lead to lower exchange rates over time, and consequently better outcomes for our entire economy, allowing New Zealand to earn its way in the world.”

“The introduction of a savings lever to dampen inflationary pressures in addition to interest rates is a good move; it will remove the Reserve Bank option to deflate the tradeable sector in order to keep headline inflation inside the target band via an overvalued exchange rate.”

“This is an important strategic change, combined with signalled fiscal policy changes to re-balance investment incentives (remove the capital gains tax exemption), encouraging greater value add from more research and development (R&D tax credits) and increasing productive equipment investment (accelerated depreciation); all speak to a coherent re-emphasis of the importance of the tradeable sector. We should never forget that a balanced current account matters to each of us as individuals and to us all collectively as a nation.”

“I have seen comment that a lower exchange rate will result in higher costs, but an overvalued exchange rate is a sugar rush to consumption that has little substance. In any event, research by the Reserve Bank of Australia indicates that the feed through of exchange rate changes to consumer prices is slow and tenuous. It is a scaremongering defence of the status quo to suggest otherwise.”

“We hope the Government will take similar steps in the lead up to the election, realising that there really are alternatives to our current situation. Focusing only on domestic price stability will not work for anyone in the long term.”

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