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The Paradox Of New Zealand’s Monetary System

Media Release
21 March 2002

Speech by Rt Hon Winston Peters, Bay Subaru Official Opening, Bay Subaru-Fiat, 398 Cameron Road, Tauranga, 6pm 21 March 2002

The Paradox Of New Zealand’s Monetary System

Recently a Wellington couple on their way to Tauranga for a holiday had to stop and ask for directions. They asked a man walking on the side of the road where the road to Tauranga was. “You’re there already!” came the reply.

The Wellington couple couldn’t believe they had found Tauranga—they thought they had taken a wrong turn and had ended up in Hamilton; since they last visited Tauranga 10 years ago. The town had grown so much they couldn’t recognise the place.

Soon Tauranga will have a population of over 100,000. It’s already the 6th largest city in New Zealand, and will soon replace Dunedin as the 5th.

Tauranga could do better, however. In many ways Tauranga has done well despite the efforts of those in Wellington. It’s done well despite burdening regulations, high tax, hands-off attitudes from the capital. It’s done well despite policies that have pushed up the exchange rate artificially over the past decade and a half.

There is one part of economic policy which has consistently stonewalled New Zealand and Tauranga’s development.

It oftentimes seems that Dr Brash is more important than the Minister of Finance.

For the past decade there has been operating in this country; the ‘Brash Paradox’ :
“How do you get economic growth? By attacking inflation. So how do you attack inflation? by attacking economic growth”

That is a vicious circle.

The Brash Paradox has cost this country dearly. It says that inflationary pressure, whether real or not, is far more important than economic growth.
Let us look at what has happened even very recently. Even before September 11 we were seeing a major worldwide economic slow-down. Did the Reserve bank cut interest rates? No, they kept them up in case of an economic recovery.

New Zealand was just the second country in the world to push interest rates up since September 11th—the first being Sweden on Tuesday night.

Now things in the world are starting to look up, but only very slowly. Instead of helping the system along, or leaving the interest rate where it is to give certainty and an incentive for investment, Dr Brash could not wait to push interest rates up, just in case you were thinking of expanding the economy.

It seems to me that there is something wrong with a reserve bank for which the answer always seems to be to push interest rates up.

Even by Dr Brash’s own predictions things are still fragile. We are only expecting growth between 2 and 3% over the next 3 years. Inflationary pressures are not even strong—inflation is expected to actually fall over the next 3 years and beyond.

So why have we seen the increase—which even that Wellington daily, hardly a Keynesian bastion, the Dominion has rubbished?

You knew something was wrong when the Minister of Finance and the Opposition spokesman didn’t support the rise; unions and employers didn’t support the rise; and business and the media didn’t support the rise in interest rates.

In fact the only person to publicly come out and praise the rise in interest rates was the well known Zoologist Rodney Hide.

Enough said!

So why does this matter? Why have I chosen this, the opening of Subaru Tauranga to make these comments?

Because it is small and medium sized businesses which are hit hardest. A raise in interest rates directly affects economic growth and job creation because it immediately imposes an extra cost on capital and finance for expansion.

Because of these increases the cost of doing business increases. Mortgage rates immediately increase and, to use Dr Brash’s comments: “economic growth is cooled down”

Businesses like this one which were either considering expanding or taking on more staff are forced to abandon those plans.

When New Zealand First was in government we made it a priority to change the policy targets agreement with the Governor of the Reserve Bank. We broadened the target inflation rate from 0-2% to 0-3%. Now this agreement needs to be changed again to include the requirement for long-term growth over short term inflationary considerations.


Surely, to so needlessly put the brakes on the economy in order to protect New Zealand from the inflationary paper-tiger which may or may not even exist at the present moment is counter productive.

ENDS

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