Chamber’s Submission on Monetary Policy Framework

12 September 2007

Chamber’s Submission on Monetary Policy Framework

The Reserve Bank’s monetary policy framework including its single focus on price stability should be left alone. This was a key message delivered by the New Zealand Chambers of Commerce to the Finance and Expenditure Committee’s monetary policy inquiry today.

“Undermining the Bank’s focus on price stability by relaxing the inflation target would raise inflationary expectations and ultimately result in higher exchange and interest rates in the medium term,” said Wellington Regional Chamber of Commerce CEO and NZCCI Director, Charles Finny.

“Giving the Bank additional targets would distract it from its primary focus of price stability. The best possible contribution that monetary policy can make to the economy is achieving low inflation.

“As well as being crucial for maintaining international competitiveness, low inflation is also the best way to maintain low interest and exchange rates in the medium term.

“Rather than change the monetary policy framework we need to address some of the policy settings which the Reserve Bank is having to lean against and implement policies which support monetary policy. It is these policy settings that are causing the inflation that the Reserve Bank is having to fight.

“Our submission has proposed the following ten policy measures which if implemented would help contain inflation and take pressure off interest and exchange rates in the process. These include:

1. Slow the growth in government expenditure
2. Enhance New Zealand’s competitive economic environment
3. Encourage the spread of migrant settlement throughout New Zealand
4. Reconsider banks’ capital adequacy ratios
5. Improve New Zealand savings culture
6. Invest in infrastructure to ease capacity constraints
7. Improve responsiveness of housing supply
8. Improve productivity
9. Cap local government rates
10. Rewrite the Policy Targets Agreement to focus on price stability

“Strong economic growth and inflation do not necessarily go hand in hand. There is too much focus on slowing demand and not enough attention on the supply side of the economy to increase capacity so that economic growth is not inflationary,” Mr Finny concluded.

ENDS

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