"What Monetary Policy?" says PEC

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"What Monetary Policy?" says Productive Economy Council

Auckland, June 12, 2009. Dr Bollard might as well put up a white flag and surrender to the Banks, says Selwyn Pellett, spokesman for the Productive Economy Council.

Pellett says yesterday's announcement by the Reserve Bank that it was not going to lower interest rates further was a sign of capitulation demonstrating Bollard's inability to influence banks over short term interest rates. Bollard's failure to lower the rate further highlights that the Reserve Bank and the New Zealand Government have no effective Monetary Policy, he suggests.

?The rapid increase in the exchange rate that followed the announcement was further evidence that we have lost control of our economy. The OCR by itself is not effective and we need new tools to influence bank behaviour,? he says.

"When the OCR was rocketing up in an attempt to control inflation in 2007/2008 the banks flooded New Zealand with carry-trade money and found more and more unscrupulous ways of getting that money into interest bearing loans at the lowest possible risk to the banks."

?Typically this was achieved by lending on property at lower deposit rates until we got to zero deposit. As a result inflation actually accelerated in the housing and farming sectors. As the carry trade continued the exchange rate rose to 80 cents against the US dollar, killing off many exporters well before there was any noticeable effect on the runaway property market.?

Pellett says now New Zealand is at the other end of the cycle, with 80 percent of New Zealand home owners still on fixed mortgages, the Banks are simply ignoring changes to the OCR and maximising their high short term interest rates to cross subsidise the lower longer term interest rates.

"We hope at least the business community can see through the Banks' dubious claims of decreasing profits and see the large reserves and impairments the banks are taking to reduce their reported profits for what they are ? a way of deferring current profits," says Pellett.

"Many of the reserves currently being taken by the banks are against loans on property. Despite recent reductions in house and farm prices and probably some increase in defaults to come I predict we will see a very large percentage of those reserves recovered over the coming year."

?You can?t blame a bank for being a bank,? says Pellett. ?They are there to take advantage of any situation they can and they will continue to do so. The real problem is we have had successive governments without the backbone or resolve to reign in the banks and put in place policies that would protect New Zealand?s Economic Sovereignty. Short of a billboard hanging in Queen Street I the loss of Economic Sovereignty could have been more clearly communicated than the events of the last year.?

The Productive Economy Council implores the Government to go back to the 130 submissions on monetary policy presented to the select committee in 2007 and review them in the quest for a better model. We cannot allow our Productive Sector (those that employ people to design, manufacture and sell goods and services) to be destroyed by the manipulation of our exchange rate by the banks in this manner.

Over the past few weeks we've seen the NZ dollar rise against the US dollar by around 30% (20% on a trade weighted basis). The PEC estimates New Zealand exporters are losing in the region of $20m to $30m a day as a result. $20m a day invested in the right places could go a long way towards improving our productivity and creating long term export earnings - and that's why Economic Sovereignty focused on external price stability is such an important issue.

"Dr Bollard needs policy tools that he can use and a supportive government that not only allows him to use them but insists on it," says Pellett. "We didn't vote banks into power to run our economy we voted in politicians. Banks will do what banks will do until a democratically elected governments calls a halt to it."

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