31 January 2013

RBNZ and Government need to focus on the real problems

The Reserve Bank acknowledges that inflation is not a problem, but continues to make that its only focus. Yet at the same time it acknowledges that the exchange rate is overvalued and is hitting export and import competing firms, and there is a risk of house prices rising too rapidly - another house price bubble.

Bill Rosenberg, CTU Economist says "it also notes the "weak labour market" - high unemployment - and that government policies are "dampening growth". In other words, the government cut-backs are holding back the economy."

"This calls for some innovative policy which targets house prices and the exchange rate rather than price increases in general. Raising interest rates would push the exchange rate higher and stifle investment and job creation."

"Instead the Reserve Bank should be using macro-prudential policies that directly target house prices, and at the same time the government should be increasing the supply of low cost housing designed for first home buyers so they don't get disproportionately hit by these policies. It would also help to keep down house prices."

"The Reserve Bank should also be considering policies to manage the exchange rate. This must include the ability to control the financial flows in and out of the country, which can drive the exchange rate in the wrong direction for exporters and firms competing with importers."

"The Reserve Bank cannot do these things alone. It needs the Government to change Reserve Bank rules, and Government action to stimulate rather than hold back the economy, including active involvement in the housing market."

"Otherwise we will continue to have high unemployment and a growing current account deficit, increasing New Zealand's large private international debt," said Bill Rosenberg.

ENDS

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