RBNZ Policy Targets Agreement must reflect changes in ‘best practice’

28 June 2012

The Policy Targets Agreement (PTA) with the newly appointed Reserve Bank Governor Graeme Wheeler must have some serious revision, says the New Zealand Manufacturers and Exporters Association (NZMEA). Wheeler was named as the Governor to replace Alan Bollard on Tuesday and will sign a new PTA with the Minister of Finance before taking over from Alan Bollard.

NZMEA Chief Executive John Walley says, “The appointment of a candidate from outside of the Reserve Bank is a good sign as there seems to be a culture of support for the status quo at the Bank, despite overwhelming evidence that it is not in New Zealand’s best interests.”

“Mr Wheeler and Bill English should be guided by the International Monetary Fund (IMF) which has described strict inflation targeting as 'not optimal' and said that 'the consequences of adverse exchange rate movements have to be taken into account' for small trade focused economies.”

“Our Government and its officials still claim that we are following ‘best practice’ with our inflation targeting monetary policy but since the financial crisis best practice has changed. A more pragmatic approach where other prices in the economy such as the exchange rate are considered are now favoured and alternatives to an inflation target have been suggested.”

A number of institutions have changed their opinion since the economic crisis:
• IMF, Rethinking Macroeconomic Policy.
• Swiss National Bank, Swiss National Bank sets minimum exchange rate.
• Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government: The Death of Inflation Targeting.

“The IMF has recently estimated that a 15 percent drop in the exchange rate would be needed to balance our current account,” says Mr Walley. “This should be a target for the Government and the Reserve Bank.”

“In the longer term a there needs to be a more balanced focus rather than strict inflation targeting. Inflation inside the target band delivered at the expense of the export sector will not deliver a sustainable economy for New Zealand.”

“The PTA should move well beyond inflation targeting - macroprudential intervention, capital controls and currency intervention all have a role play as we have seen elsewhere. Balanced objectives, better controls around asset bubbles, and the specific control of domestic inflation should all be part of the new PTA.”

ENDS

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