RBNZ must continue to add tools to monetary policy

The Reserve Bank announced new tools to be used to prevent future banking crises yesterday with the Core Funding Ratio and new Basel III regulations topping the list. Our economy is way out of balance so any effort to look beyond the simplistic interest rate tool to push back against asset price inflation is welcomed say the New Zealand Manufacturers and Exporters Association (NZMEA).

NZMEA Chief Executive John Walley says, “The Core Funding Ratio and Basel III rules are a positive move by the Reserve Bank, and these need to be implemented as quickly as possible. We need to stop growth based on asset price driven debt and consumption - growth from production and exports will be the story of the foreseeable future. In the past decade the lack of a targeted response to the drivers of domestic inflation damaged our productive industries.”

“Any moves to prevent a repeat of these mistakes must be supported.”

“There will be opposition to the speedy implementation of these changes from the banks and heavily indebted sectors, as there may be increases in the price of credit, but this is a necessary part of the rebalancing process.”

“Over the longer term, loans in New Zealand will have less associated risk as a result of the new regulations, and the RBNZ will not need to hike the Official Cash Rate as much, ultimately leading to lower interest rates,” says Mr Walley.

“The Reserve Bank must seek out ways to support, even encourage, the rebalancing of the economy. Weighting reserves by asset class would enable better targeting.”

“Further efforts from the Reserve Bank are needed as an overvalued exchange rate, a persistent current account deficit and a stagnant traded sector demonstrate that we have a system that does not work. These moves are a step in the right direction.”

ENDS

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