Inflation targeting has failed, RBNZ needs to change, says Parker
By Pattrick Smellie
Sept 19 (BusinessDesk) - Two decades of conventional monetary policy targeting low inflation have failed New Zealand, which has come through the global financial crisis with an over-valued exchange rate and persistently high balance of payments deficit, says Labour's finance spokesman David Parker.
The Reserve Bank of New Zealand should be looking to copy other countries' central banks to "put grit into incoming capital flows", target a lower exchange rate, and use new tools intended to protect financial system stability to produce better economic conditions for exporters.
The central bank could also benefit from running monetary policy less predictably, since New Zealand's orthodox approach was almost certainly encouraging foreign currency traders to park funds here, strengthening the dollar, in the belief that they fully understand how monetary policy will be run.
In the wake of the global financial crisis, the major economies were pursuing "competitive devaluation" of their currencies to kick-start economic activity.
"We ignore this at our peril," said Parker, yet New Zealand and Australia were "sticking with the paradigm" for monetary policy that had been place since the late 1980s.
Parker's comments, in an interview with BusinessDesk, followed meetings in the US and Europe to investigate new monetary policy options. They coincide with a warning from JB Were's New Zealand head of strategy, Bernard Doyle, that New Zealand's orthodox approach to monetary policy is hurting exporters at a time when other countries are "breaking all the rules."
Doyle urged the RBNZ this week to "lean against the high New Zealand dollar using a blend of creative credit easing and New Zealand dollar intervention."
The growing calls for action on the dollar also coincide with the arrival of the new RBNZ governor, Graeme Wheeler, a New Zealander who has been working as one of three managing directors of the World Bank in Washington DC.
Prime Minister John Key said the Cabinet had signed off Wheeler's new Policy Targets Agreement at Cabinet this week, with "very modest" adjustments. Government MPs are expected to kill a New Zealand First private members' bill seeking a wider mandate for the RBNZ at the first reading today.
Parker also called for more honesty from the central bank, saying its shortcomings over the past decade should be acknowledged in the same way that successive RBNZ governors have urged governments to run balanced budgets and pursue competitiveness through micro-economic reforms.
"It really annoys me when monetary policy says it's all everyone else's fault," he said. "Inflation targeters should own up to their mistakes."
The RBNZ had failed to stop the credit boom of the mid-2000s, despite raising benchmark interest rates to a high point of 8.25 percent before the global financial crisis in 2008.
It should now be given a wider set of objectives, including being allowed to use new macro-prudential tools, which can require banks to lend less and hold more capital on their balance sheets, not just for financial stability reasons, but to make the economy conducive to entrepreneurs and exporters.
While inflation could not be allowed to get out of control, "we have to say their primary function is not inflation-targeting."
Speaking to BusinessDesk earlier in the week, Doyle drew a distinction between a central bank intervening to try and strengthen a currency and seeking to place an upper limit.
"You're dreaming if you are trying to preserve a floor in the currency," he said, but the Swiss central bank had proven it was possible to set a ceiling on a currency's value.
"It's plain wrong that a central bank can't put a cap on a currency."