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Monetary Policy Needs Mates

27 October 2005

Monetary Policy Needs Mates

“The Reserve Bank’s task of containing inflation is being made more difficult by other government policies”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today. He was commenting on the increase in the Official Cash Rate to 7.0 percent.

Mr Kerr said that the process of reducing inflation in the 1990s was helped by such factors as stronger fiscal discipline, deregulation to make markets more competitive, corporatisation and privatisation that increased efficiency, a freer labour market that limited across-the-board wage increases, and tax reductions.

Inflation – an ongoing increase in the general level of prices – is a monetary issue, but the accumulated effects of other government policies are putting pressure on costs and prices and exacerbating the imbalances that concern the Bank.

Key drivers include:

- very high rates of increase in government spending;

- cost-increasing employment law changes, such as holidays legislation (and the proposed increases in the minimum wage will add to wage pressures);

- the expanded role for local government, which is generating high rate increases;

- poor infrastructure policies;

- the Resource Management Act and urban intensification policies that are putting pressure on house prices; and

- the rising tide of business regulation.

“To help the Reserve Bank in curbing inflation, other policies should be made more consistent with a firm monetary policy”, Mr Kerr said.

“Priorities include reductions in baseline government spending to offset new commitments, reductions in taxation (and the abandonment of the carbon tax), constraints on local government, and a broad review of business regulation similar to that being undertaken by the Australian government.

“The Reserve Bank is doing too much of the heavy lifting and the unbalanced policy regime is threatening economic growth. The Bank’s criticism of household spending, borrowing and lending is misplaced – it should not be blaming the private sector. Rather, while operating a non-inflationary monetary policy, it should be calling for government action to support its role”, Mr Kerr concluded.

ENDS

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