Finance Minister Bill English and Labour’s Economic Development spokesman David Parker clashed in Parliament yesterday over New Zealand's monetary policy, with English noting the status quo has regularly been given a world’s best practice tick, while Parker argued the Reserve Bank needed further tools and powers to be able to better control the currency.
Labour has said it would look to give the Reserve Bank further tools to control lending growth in New Zealand, possibly giving it the ability to dictate loan-to-value ratios for bank mortgage lending, and focus more on policies other than inflation targeting. Labour has also talked about requiring the Reserve Bank to intervene more regularly, although irregularly, in the currency markets to keep speculators 'on their toes'.
The Finance Minister on Thursday said although the government despaired at the current height of the New Zealand dollar, there were no obvious monetary policy tools which could be used to drive it lower. The current situation meant there needed to be more of a focus on raising the competitiveness of New Zealand's export sector.
The Reserve Bank has in fact been given more tools to accompany monetary policy during the current Parliamentary term, with its Core Funding Ratio requirements becoming effective in April last year.
The ratio was an effort to force banks to source funding from more stable sources than short-term money from global wholesale markets, examples being through local deposits and longer-term wholesale funding.
Geoff Simmons, an economist at Gareth Morgan Investments, explained the basic idea behind the CFR in an opinion piece last week:
The upshot of this is that unless banks can source enough of this kind of funding, they won't be able to make any more loans.
So far this Core Funding Ratio has been introduced gradually by the Reserve Bank, so that banks have had time to adjust. Term deposit rates did rise a little as a result. However, when the tool was launched the Reserve Bank hinted at the possibility that this ratio could move up and down according to economic cycles.
In the good years, private banks would be required to build up a war chest of stable funding that they can rely on when times turn tough. Conversely when the bottom falls out of the property market and bad debts pile up, the restrictions can be reduced.
Meanwhile, the New Zealand dollar hit record post-float highs in recent weeks of over 88.4 US cents, prompting increasing calls from exporting groups and the Labour and Green parties that the Reserve Bank should intervene in the currency markets to try and push the NZ dollar down. This, however, has been met with stern resistance from the government, while Reserve Bank Governor Alan Bollard isn't too keen on the idea, given current market conditions where the US is devaluing its currency.
'Best practice, although not always best actions'
Asked in Question Time in Parliament whether he thought New Zealand's current monetary policy was 'best practice', English replied he did, although "not that that means necessarily the Reserve Bank has made, in retrospect, the ideal decision in every case".
"But that view that New Zealand’s monetary policy framework is best practice was confirmed by I think five different reviews under the previous government, as well as our own,” English said.
Asked by Parker what changes to monetary policy and Reserve Bank powers the government was currently considering considering, the Finance Minister replied:
“We’re not proposing significant changes because we don’t believe that such are required. What has happened is that what’s now called macro-prudential policy has become an important part of the mix of tools available for determining monetary conditions, and the New Zealand Reserve Bank has been something of a world leader in transparency in its macro-prudential approach.”
'Of course the high NZ$ makes it hard'
Parker referred to Fran O’Sullivan’s comment piece in the NZ Herald on Wednesday, where O'Sullivan wrote a bizarre alternative reality had emerged, noting English’s comments that New Zealand was emerging as a global ‘safe-haven’, while that due to the height of the dollar, New Zealand was no longer a safe-haven for exporters.
English replied: “I think the bizarre alternative reality is what we saw happen in Washington over the last couple of weeks, what we see happening in Europe, where both of those [economies] are following policies that are devaluing their currencies quite considerably.
“Of course a high dollar is difficult for our exporters, we would much prefer the dollar to be lower. But there is no obvious monetary policy tool that could achieve that,” English said.
English noted there had been a number of reviews carried out on monetary policy over the last decade.
“The first was in 2000 by Professor Lars Svensson, who found that our monetary policy is entirely consistent with best international practice," he said. See that review here.
“The most recent review was undertaken by the Finance and Expenditure Committee in 2008 under Charles Chauvel, which found that New Zealand’s monetary policy approach is standard among small, open, developed economies, and is regarded by our advisors as world best practice," English said. See that review here.
“In fact no changes have been made as a result of four or five reviews over the last ten years, and that’s because there’s no obvious changes that can be made,” he said.
English was then asked by Parker whether he had seen comments recently by Rakon and the New Zealand Exporters and Manufacturers Association calling for substantial changes to monetary policy, while the government said there was nothing the government could do to lower the dollar.
English replied: “Not only have I seen those reports, I’ve discussed this matter with any number of exporters. And when they are asked just what changes they actually want to the monetary policy regime, I’ve found that the various propositions amount to small wording changes, which anyone who knows about monetary policy would say don’t make much difference to the practical conduct of monetary policy."
"We would prefer a lower exchange rate, the world’s not delivering that to us, so we have to get on with being a very competitive economy, so that our exporters can do business profitably," English said.
Parker continued with a bit from O’Sullivan’s article that noted the Prime Minister, when leader of the opposition, had approached her four years ago in Sydney saying New Zealand exporters could not sustain business at 74 USc and that something needed to be done.
“The fact is the exchange rate has reached levels I don’t think any of us anticipated, and that simply shows the size of the challenge this economy has in becoming competitive enough to create jobs and incomes," English said, before squeezing in a stab at Labour's economic policy:
"The alternative of more government spending, higher taxes and more debt is a recipe for a much worse outlook for exporters, not a better one," he said.
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