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Mallard flies flag to reform Reserve Bank act
July 3rd, 2008
Nudged along by Reserve Bank Act sceptic Winston Peters, the Labour-led government is floating the idea of widening the scope of the Reserve Bank Act away from its singular focus on inflation.
Answering questions from the NZ First leader in parliament late yesterday, the Associate Minister of Finance Trevor Mallard said; “The Government is open to looking at alternatives that best serve the modern New Zealand economy.”
He was referring to a question from Peters about a line in the Reserve Bank’s Statement of Intent for 2008-2011 issued on Monday which talked about “options for alternative instruments.” Most observers saw the line as referring to studies in 2006 and 2007 about Supplementary Stabilisation Instruments that included minor issues such as a mortgage interest levy.
But Mallard appeared to be talking about wholesale reforms of the act, including altering its singular focus on inflation.
Read the full exchange below as reported by Hansards.
6. Rt Hon WINSTON PETERS (Leader—NZ First) to the Minister of Finance: Will the results of the Reserve Bank initiative to pursue “options for alternative instruments” for monetary policy be made publicly available; and at whose behest was the addition of this initiative in the Reserve Bank’s latest statement of intent?
Hon TREVOR MALLARD (Associate Minister of Finance) : on behalf of the Minister of Finance: Yes, and the addition of the initiative arose out of discussions between the Minister of Finance and the Governor of the Reserve Bank.
Rt Hon Winston Peters: Can the Minister confirm that this is new, and will the options for alternative instruments include taking into account the balance of payments, exports, GDP growth, and full employment as equally important elements as controlling inflation, as identified in a Business and Economic Research Ltd study of June 2008; if not, why not?
Hon TREVOR MALLARD: I think it is too early to anticipate what will be included, but what is clear is that when it was introduced the inflation target was appropriate for the newly independent Reserve Bank of New Zealand to have a single inflation-focused objective. However, the economy has changed a lot in the last 20 years: the major sources of inflation are different, and we have a much more open economy. Over recent years the Reserve Bank has been faced with two quite different monetary policy challenges. For a number of years, under both governors, inflation has been driven by increased domestic demand that stems from a buoyant housing market, fuelled by cheap foreign capital attracted by a stable economy and relatively high interest rates. Now we have inflation challenges driven by record high international prices of food and oil. In both cases the tools available to the Reserve Bank have not been able to address those problems. In fact, in the first case it could be argued that they exacerbated the problem. The Government is open to looking at alternatives that best serve the modern New Zealand economy.
Moana Mackey: Is the Government open to proposals to improve the operation of monetary policy?
Hon TREVOR MALLARD: Yes. That is why we commissioned the Supplementary Stabilisation Instruments report from Treasury and the Reserve Bank. When it became clear that it would not be possible to get political consensus around any of those proposals, we invited the Finance and Expenditure Committee to conduct an inquiry into monetary policy involving all political parties. But at every step the National Party, and especially Bill English, have done all they can to derail and disrupt attempts to obtain political consensus around this very important economic issue.
Rt Hon Winston Peters: Will the Minister confirm what New Zealand First has said for a long time: that the Reserve Bank Act simply does not work for this economy; and is he aware that the Bank of England recently allowed inflation to exceed its targeted range, stating that an attempt to counter a rise in food, energy, and import prices would result in “unnecessary volatility in output and employment”; and given our Reserve Bank estimates that 90,000 New Zealanders must lose their jobs over the next 3 years if we are to meet the inflation targets by using tight and high interest rates, does he accept that 90,000 job losses, with possibly 250,000 dependants losing their income, and 1 percent to 1.5 percent GDP growth are merely collateral damage?
Hon TREVOR MALLARD: My position on this is that the Reserve Bank of New Zealand Act has not worked as well in the last decade as it did in the first.
I asked Finance Minister Michael Cullen the following questions via email to his media advisor. His responses are in bold.
- Does Dr Cullen agree with Mr Mallard that the Reserve Act has not worked well in the last decade?
- Does Dr Cullen agree with Mr Mallard that the government is open to alternatives to the current Reserve Bank Act and the current Policy Targets Agreement?
- What alternatives is the government considering? Do they include widening the focus of the act away from purely focusing on inflation (with the riders of avoiding instability in other indicators). Ie Does he want the RBNZ to focus on growth and exports as well as inflation?
- Does Dr Cullen want the Reserve Bank Act to become a political issue during the election campaign?
- Does Dr Cullen agree with Mr Peters’ criticisms of the Reserve Bank Act.
Dr Cullen agrees that there have been more difficulties in the implementation of the Act over the last decade than there were in the first.
Dr Cullen has consistently advocated that the operation of monetary policy should be kept under review
At this point the government is not actively considering alternatives. But the government is open to considering alternatives. We await with interest the recommendations of the Finance and Expenditure select committee inquiry and the results of any work undertaken by the Reserve Bank.
It clearly already is and has been at almost every election since the Act came into force.
To the extent that the operation of monetary policy has impacted disproportionately on the exporting sectors.
Tags: Michael Cullen, Reserve Bank Act, Trevor Mallard, Winston Peters
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July 3rd, 2008 at 9:55 am
“My position on this is that the Reserve Bank of New Zealand Act has not worked as well in the last decade as it did in the first.”
That would be the decade when the inflation target was progressively weakened to the point that it’s now completely meaningless? Couldn’t agree with you more, Trev.
July 3rd, 2008 at 10:09 am
I think its great the govt is showing leadership at last. While they are at it I recommend a reduction in govt spending by 50% and a corresponding drop in taxation to stimulate the economy.
July 3rd, 2008 at 10:32 am
I’m delighted with the thought that this subject might become the focus of election policy debate – as the public certainly need to become better informed in order to make their own assessment of monetary policy going forward. I will be particularly interested, as it could be a major point of difference between the two main parties.
July 3rd, 2008 at 10:41 am
Anyone that has an interest in this topic must read a book by Bob Jones called ‘Prosperity Denied’. In that Jones talks about why the RBNZ is ridiculous and act’s like a straight jacket on the economy. He says the real cause of inflation is wasteful government spending and an over regulated economy.
A true free market will find the lowest possible price for the consumer. However we don’t have a market economy, it’s a mixed or social economy according to the online Wikipedia definition. An open economy has what’s called ’spontaneous order’ which is the seemingly random way an economy sorts its self out WITHOUT GOVERNEMT INTERVENTION and will find the lowest most competitive price of any goods or services.
Very low productivity is the result of an inefficient over regulated market. An increase in the money supply will only result in high inflation or stagflation like we have now. We need a totally new approach to monetary policy and some real leadership from a new government. The trouble is ignorant middle NZ will fear change which may be why the country is in this mess.
Interest rates don’t control inflation. An open and free market economy with out any government ownership of assets or intervention in the monetary policy is the only solution.
July 3rd, 2008 at 11:10 am
Commentators regularly bemoan the ugly current account deficit and our abysmal export performance, yet during the last 5 years manufacturers/exporters have clearly been the sector to suffer the most under the current Reserve Bank Act. Dogmatic monetary policy has given carry traders a dream run, resulting in a completely overvalued currency. Keeping interest rates at scorched earth levels for so long clearly begs the question: who will be left to switch the factory lights back on when inflation is finally at “acceptable” levels? Dairy seems to be doing OK (but for how long – there is something very bubble-like about commodities at the moment, and the south Americans are certainly not sitting on their hands) but otherwise we now have an export economy that is hardly more diversified than it was 40 years ago. Certainly the incentives to set up operations as a manufacturing exporter have been zilch for quite some time.
Yes taming inflation is important, but there must be a better way. As owner/director of a manufacturing export business, I too would like to know the position of the “business friendly” National Party on this issue before the next election.
July 3rd, 2008 at 11:15 am
[...] blog (*) (h.t. Bryan Spondre) Possibly related posts: (automatically generated)RBNZ, NZX and equity [...]
July 3rd, 2008 at 11:19 am
neil c – exactly, we need to know what National’s policy is, as so far all we understand it to be is “no change”.
Alistair, you mention Sir Bob’s suggestion that “the real cause of inflation is wasteful government spending and an over regulated economy.” So, I tried to think – which economy is the most deregulated – and thought of Hong Kong. But inflation there is running at 5.7% at present;
http://english.people.com.cn/90001/90776/90884/6434379.html
So, I sort of question that theory. Or, perhaps HK is not the right example? Is there some other economy which is less regulated and has extremely low government spending?
July 3rd, 2008 at 11:47 am
Bob Jones is the ultimate pirate kiwi property speculator. If you are expecting profound economic wisdom from an individual who’s raison d’etre is to leverage property with the cheapest credit available then I think you need to read around a bit more. Such characters are more than happy to see rampant inflation – after all it erodes the debt that they accrue in assembling their property portfolio. They have zero interest in the fact that such inflation hurts the other 99.99% of the population of these islands.
In some ways I am looking forward to inflation climbing up above 5%, and then heading up to 10% (which would seem to be a given if the pressure on the RBNZ mounts to abandon inflation targeting). Folk seem to have forgotten the evils of rampant inflation, perhaps a good dose is what is needed to bring some reality to the debate.
July 3rd, 2008 at 11:51 am
maybe bob jones and trevor mallard are big hitters but not in an economic arena,why dont we let the new govt whoever they may be,we know they wont include mallard,try something new they couldnt do worse surely.
July 3rd, 2008 at 12:09 pm
Andy, your recipe for controlling inflation without pulverising the economy please? I understand quite well the evils of rampant inflation given that I am a member of the supposedly “privileged” baby boomer generation; fortunately this also means I understand the evils of rampant unemployment as well. A debate on the Reserve Bank Act is long overdue.
July 3rd, 2008 at 12:53 pm
Neil – my recipe would have been interest rates higher, sooner, than actually happened, allied with some fiscal responsibility from the government (which clearly didn’t happen). Throw in such reforms as anti- property taxation (anyone for capital gains tax?) to focus the economy away from its biggest millstone (the property bubble). Since fiscal responsibility and the appropriate property taxation measures are absolute non-runners with the politicos/public we are left with, you guessed it, interest rates. I must confess I don’ t recognize (as yet) a pulverised economy – one in recession, yes, but with unemployment as yet at 3.8% (though rising) I do question that a bit. Unemployment at twice that rate would start to register on my ‘pulverisation’ index.
My real fear is a run on the $, provoked at least in some major degree by this talk of abandoning inflation targeting (which I think is at the heart of the debate). If we have problems now, they are but small beer as to what would happen if the Forex markets get the whiff that the RBNZ has given up/relaxed on inflation targeting. We have got ourselves into this mess, and the fact is it may be a case of now taking the least worst option.
July 3rd, 2008 at 12:55 pm
“Andy, your recipe for controlling inflation without pulverising the economy please? ”
This is what is predicted by peak oil theory.
maybe it’s time to listen to Herman Daly?
July 3rd, 2008 at 12:56 pm
I see inflation heading above 5% no matter what (same goes for upwards of 10%) – as the indications are that the world is heading in the direction of a commodity bubble now we have bear markets in both property and equity. So, my guess is, rampant worldwide inflation is inevitable. I get the feeling, market theory doesn’t follow any ‘rational’ rules when there isn’t any cash around. Profiteering takes over.
Clearly, govt has to spend less, homeowners need to pay down debt, the NZ dollar needs to devalue, we need to maximise export incentives in the appropriate sectors given current global trends (tourism, for example is a huge foreign currency earner at present – and with global recession there is no point in propping up that sector as we do at the moment through all the economic development initiatives in both local and central government)… and I could go on and on about the totally changed economic landscape I suspect we (and the world) are heading into.
I think any sane government would be putting together a sort of disaster recovery plan – and that must require re-thinking monetary, social and economic policy.
July 3rd, 2008 at 1:07 pm
aaahhh don’t get me started on peakoil John, then it really will be a trip to the dark side……
July 3rd, 2008 at 1:14 pm
Readers might be interested in Roger Kerr’s related post on Budget 2008 here or Neville Bennetts post on inflation here.
July 3rd, 2008 at 1:15 pm
Andy maybe you haven’t read this yet from two RBNZ economists:
…That experience may underpin two more of Riddell and Sleeman’s conclusions: “Resisting falls in the exchange rate usually exacerbates the downturn” and “Forecasters, at the bank and outside, typically have little idea how deep any slowdown will be until we are well into it.”
http://www.nzherald.co.nz/category/story.cfm?c_id=34&objectid=10519638
There ain’t any way the Reserve Bank will be able to defend the NZD with even higher interest rates in the face of a crumbling economy – overseas investors will consider the risk just isn’t worth the return.
I don’t think anyone is criticising the actual inflation target – it’s just how the RBNZ goes about achieving it that needs fixing (reduce government spending without raising interest rates – now there’s a thought). At the moment the NZ economy is totally unbalanced and unsustainable the way it is – something’s gotta give…
July 3rd, 2008 at 1:42 pm
Neil – I am not suggesting the RBNZ defends the $ with even higher rates at this juncture – I am saying that the simple act of CUTTING rates in the ultra inflationary times we live in (when almost all other central banks are raising/thinking of raising rates) may be enough to cause a sustained run on the $. With the resulting problems arising from that eventuality the Bank might then be forced to reverse course again to defend the $ – result worse pain. We already have 2 of the 3 pre-requisites for a good old fashioned run on the kiwi (an overvalued $, a yawning trade deficit, and what with the Labour spend up planned for the next 12 months (election bribes/tax cuts), the third, a government fiscal deficit, will be along shortly.
Again for me it comes down to the least worse option at the moment – which would be leaving rates where they are, and ending this talk of the RBNZ going soft on inflation.
July 3rd, 2008 at 1:44 pm
if you accept recession as a given then people will stop spending,businesses that depend on discretionary spending will fail and all tax revenue for the govt will fall.interest rates and the dollar will fall.so put the chequebook in the drawer and if you got some spare dough put it in another currency.it shakes out all the five minute millionaires and happens about every 10years.
July 3rd, 2008 at 2:47 pm
Andy – so you want to keep the economy unbalanced for even longer? Nice way to make sure the inevitable correction will be even more brutal when it comes (as it must). Other central banks are raising/thinking of raising interest rates? Sounds like they’re catching up, not showing us the way. NZ has had by far the most restrictive monetary conditions of any OECD country for several years now even though our inflation rate is well below the OECD average. I give Bollard credit for being able to assess that the patient has been given enough medicine before he dies of an overdose.
Kate – sounds like you’re aiming for a balanced, sustainable economy. Unfortunately it would take vision to get there, not dogma (which we have always had an abundance of in NZ).
July 3rd, 2008 at 3:23 pm
Neil – comparing our backward looking inflation figure (the present one for example represents the average of the months Jan, Feb,March) with the OECD average (many if not most OECD countries publish monthly inflation figures, so it many countries it represents their inflation as of May in the example given) is disingenuous at best. The RBNZ has already stated that it expects inflation of 4.7% for the 3rd quarter (a figure that might be surpassed in the NEXT quarter, based as it was on the risible assumption that oil was going to fall back towards $US100 – bare in mind food inflation came in at a mighty 6.8% in June). I maintain that if Bollard cuts in the face of these sorts of inflation figures the Forex markets will slaughter the kiwi (and I will join them). But we will just have to wait and see………..ironically our inflation rate is rapidly catching up with our interest rates, a scenario which to put it mildly, is fraught with danger.
July 3rd, 2008 at 5:16 pm
why would they change anything now after nine years in office,maybe it is just political theatre to force john key into saying what he is really going to do when he gets the key to the money bin.if there is a panic starting to happen in the markets then steady hands on the tiller are required.
July 3rd, 2008 at 5:30 pm
Winston Peters and Trevor Mallard running monetary policy….God Defend New Zealand. Next thing we’ll be hiring Robert Mugabe as a special consultant.
This is the bit where we forget about all the hard lessons learned a generation ago and pretend that inflation’s not really such a bad thing after all. The only answer is a return to the gold standard – the only proven automatic check on credit expansion. This is especially important in a small economy, where wildly fluctuating exchange rates makes long-term business planning next to impossible.
July 3rd, 2008 at 8:29 pm
All those real estate agents and government consultants losing their jobs, ooh, horrible! No! lets lower interest rates, we want to borrow more, the rest of the world is doing it, so should we.
Where can I hand over my savings right now.
July 3rd, 2008 at 8:59 pm
maybe its working the dollar is going down.