Monetary Policy Credibility Must be Restored

Monetary Policy Credibility Must be Restored

“The toxic combination of confusion around monetary policy, the impact of government spending on interest rates and the exchange rate, and the slump in productivity growth are putting New Zealand’s economic outlook seriously at risk”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

These were the main points of the Business Roundtable’s submission to the Inquiry into the Future Monetary Policy Framework being undertaken by the Finance and Expenditure Committee of Parliament.

The submission reported Nobel laureate in economics Edward Prescott as saying “All respectable economists agree inflation is a monetary phenomenon”. The Reserve Bank has full control over the supply of money and should be held fully accountable for inflation.

Mr Kerr said the Reserve Bank had failed to place the importance of price stability and its ability to maintain it at the heart of its communications in shaping inflation expectations. It had created confusion in focusing instead on capacity constraints, excess demand, the housing market, bank lending, consumer spending, tax rules and other non-monetary issues.

The submission said that the present monetary policy framework was sound although the successive increases in the Policy Targets Agreement had undermined it and should be re-examined. The search for ‘alternative monetary instruments’ was unnecessary and should be abandoned.

At the same time a raft of government policies were making the Reserve Bank’s job harder. putting pressure on the exchange rate and hurting exporters.

Foremost among these was the surge in government spending. The submission called for spending to be cut back or deferred in a mini-budget.

It also focused on the dramatic slump in productivity in the context of inflation being ‘too much money chasing too few goods’. Productivity-enhancing reforms to increase the supply of goods and services were urgently needed to reduce the need for excessive monetary restraint and arrest New Zealand’s declining growth rate.

“With the exchange rate at punishing levels, inflationary pressures persisting and the economy slowing to a crawl despite high terms of trade and a buoyant world economy, no time should be lost in clarifying monetary policy and adopting a better policy mix”, Mr Kerr concluded.

ENDS

www.nzbr.org.nz

Attachment: Submission to the Inquiry into the Future Monetary Policy Framework

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