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Labour's monetary policy prescription warrants consideration

April 29, 2014

Labour's monetary policy prescription warrants consideration

The changes to monetary policy proposed by Labour have merit and warrant careful consideration, particularly as the Reserve Bank's independence would be preserved, the Employers and Manufacturers Association says.

"Apart from our investment in housing, we're constantly told we're poor savers, and our exporters certainly deserve a better priced dollar - this policy prescription addresses both of these fundamental issues," said Kim Campbell, EMA's chief executive.

"What's more, New Zealanders would keep their added savings rather than see them disappear when interest rates rise.

"It could work out well in the longer term.

"But it wouldn't work unless Kiwisaver is made compulsory, an idea whose costs may fall unfairly on small businesses.

"Increasing our savings rate is important for our producers to rely less on borrowings from offshore, which adds to the upward pressure on the exchange rate.

"The proposals draw heavily from other successful countries where mandatory savings are the norm, such as Singapore which has a variable savings rate, and Australia.

"The variable savings rate concept is a good idea; it would not be a good idea to allow politicians to determine what it should be.

"The policy is not sufficiently clear on whether employers' Kiwisaver contributions would be increased, which would not be helpful, and employers will be seeking reassurances that the variable savings rate would apply only to the employee contribution.

"The idea that the Reserve Bank should have responsibility for inducing a positive external trade balance is farfetched, and could be problematic. We would urge extreme caution over this suggestion.

"The wording otherwise for widening the Bank's objectives is not out of line with how other countries instruct their central banks, though we are concerned about how the changes were to be implemented and the risk of confusing the Bank's mandate.

"The policy proposals are also very light on the tight fiscal discipline business expects from the government.

"Certainly they show a level of thought well in advance of Labour's poorly considered proposals for reforming the electricity market."

ENDS

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