Government and Reserve Bank should intervene more in economy as others break the rules, JBWere economist says

The government needs to be more supportive of industries facing temporary headwinds, and the Reserve Bank should lean against the rising New Zealand dollar to counter shifts in the global economy as central banks around the world 'break all the rules,' JBWere economist Bernard Doyle says.

Doyle says the RBNZ should be very worried about the financial stability of the New Zealand economy, as it faced a widening current account deficit which would not be as readily accepted as before the global financial crisis.

He suggested one option for the Bank was to cut the Official Cash Rate further from its record low 2.5%, although accompany this with housing lending restrictions to diffuse the risk of runaway house prices.

Alternatively, the central bank could follow in the Bank of England's footsteps and channel cheap loans through the banks into non-financial business or to those building more houses.

Doyle also suggested the Reserve Bank impose a soft cap on the New Zealand dollar, where it would buy foreign exchange at pre-set bands.

He also said the review announced by SOE Solid Energy into its mining operations last month was an important precedent for the government when it came to dealing with sectors of the economy facing temporary headwinds.

While he cautioned against governments 'picking winners', targeted temporary help could counter a hollowing-out of the productive sector due to the imbalances which had been created in the global economy.

Help could be targeted at specific industries or regions. Doyle also suggested the government actively attract resettlement of New Zealanders who had emigrated to places like Australia as the mining boom there cooled off.

Fundamental shift

In a note released on Monday, Doyle said the global financial crisis had lead to a fundamental reshaping of the global economic landscape.

"Growth around the world is lower, less stable and more reliant on policy support. To date, New Zealand, a small open economy, has been surprisingly immune to these forces. But developments over the past month suggest to us that is changing," Doyle said.

He pointed to Solid Energy's review of its mining operations and the announcements of job cuts recently at both Norske Skog's Kawerau paper mill and Rio Tinto's Tiwai Point aluminium smelter as examples of how the crisis was affecting New Zealand.

"There are some obvious common threads amongst these developments. The role of the high New Zealand dollar in undermining industrial exporters is not a new phenomenon. Neither is the reality that commodity exporters face price volatility that will regularly threaten the viability of NZ based producers," Doyle said.

"However we believe the reshaping of the world following the financial crisis has implications for New Zealand that will challenge policy makers to think creatively," he said.

Breaking all the rules

New Zealand was a rarity in the global economy, with positive interest rates and no quantitative easing

"In other words, relatively orthodox monetary policy. Unfortunately, in a world where the major central banks are breaking all the rules, this is not an advantage," Doyle said.

He noted:

• The Federal Reserve about to print an unlimited quantity of money in an effort to boost growth and lower unemployment;

• The Bank of England printing money and providing cheap loans to households and businesses;

• The European Central Bank is making cheap money available to banks and sovereigns;

• Asian Central Banks, which typically have pegged currencies, are diversifying reserves, we suspect including into NZD and AUD.

• Most controversially of all, the Swiss Central Bank has had a hard ceiling on its currency for the past year.

"Against this backdrop, the RBNZ has been playing with a straight bat. This has the impact of importing other countries’ problems. Money printing in the US is artificially depressing the USD," Doyle said.

"Similarly the increasingly exotic tactics of the other major central banks to pump prime growth is weakening their respective currencies. This is keeping the NZD above where it would otherwise be given our economic fundamentals," he said.

"The outgoing RBNZ Governor has described monetary policy as in a "reasonably sweet position”. This is partially true – the RBNZ has rate cuts to use if required – a luxury many Central Banks no longer have. However we think the RBNZ should be very worried about financial stability in the New Zealand economy. The combination of the rapid retrenchment we are seeing in parts of the manufacturing sector combined with a resurgent housing market is a red flag.

"Left unchecked, we could be heading back into current account difficulties. New Zealand got away with large, persistent current account deficits pre-GFC. Post-GFC, this will be a riskier scenario," Doyle said.

What to do?

The major central banks around the world were bending or breaking the rules of economics, which meant the RBNZ needed to respond in a way that leant against the imbalances washing up on New Zealand shores.

Doyle suggested:

• Cut rates further. This would spark up the housing market, so would need to be accompanied with policies that inhibited borrowing growth – the RBNZ is already looking at these sorts of tools (for example LVR limits). Alternatively, explicitly including a rate of house price inflation in policy deliberations (eg 10% annually or less) would help defuse the risk of runaway house prices.

• Don’t cut rates, target lending. Take a leaf out the Bank of England’s book and channel cheap loans via banks into non-financial businesses or those building homes. This would deliver rate relief to those who need it, while avoiding the housing market excesses that could emerge from a rate cut.

• Soft caps on the NZD. Establish pre-set bands that would see the RBNZ accumulate foreign exchange (eg 0.8250; 0.8500; 0.8750; 0.9000). These alone won’t stop currency appreciation, but would make it clear to NZD buyers they were trading against the Central Bank.

Govt needs to step in

Meanwhile, the RBNZ could only do so much to mitigate the impact of the post-GFC environment on the NZ economy.

"Increasingly, we see a role for Government. This is particularly the case when it comes to nurturing the productive economy – something the RBNZ can only target with relatively blunt tools. The Government has far greater flexibility to provide targeted support," Doyle said.

• Continue to keep pressure on Government spending. This is one of the most effective ways the Government can contribute to financial stability; but

• Target support of industries that are facing powerful, but possibly temporary headwinds;

• Target support for regions that are most exposed to the manufacturing downturn (eg Central North Island, West Coast of the South Island)

• With the mining boom cooling in Australia, actively attract resettlement of New Zealanders that have emigrated.

"The Government and Reserve Bank cannot completely insulate New Zealand from the forces reshaping the global economy. However they can work against the most insidious side-effects: NZD overshoot; hollowing-out; and housing market overheating," Doyle said.

"Currently, we feel the response of both the RBNZ and Government is too passive."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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15 Comments

""çentral banks around the world break the rules.""
 
thats pretty good coming from an economist for jbwere which has a strong relationship with GOLDMAN SACHS.
Pot kettle black just three words that come to mind

Yeah - you have to laugh - break the rules more here than they already are to make it more profitable for the entitled - greed knows no bounds. The same that moved industry out of the country on the wave of a strong dollar and global trade sentiment nonsense now want it weak to repatriate at a higher return - when will the favoured lay off trying to steal from NZers?
 
Just invert the yield curve and all the nonsense would disappear - oh no that is too easy.
 
We have little to worry about on this score while our banking giants wish to repatriate their NZD spoils at the best rate possible - a humble National party will see to it. 

while our banking giants wish to repatriate their NZD spoils at the best rate possible -
Stephen. H, that's a tee shirt I'd like to see at National's next rally.....no need to explain it, a show stopper for weasels inhabiting both the RBNZ and the BEEHIVE. 

Maybe there is simpler explanation about our monetary policies direction:
the old rich guys want to retire with big bucks in Hawai before everything colapse ?!?!?!
High NZ$ lets them do this - who cares about us...?

Stp - a very valuable contribution, and not that unusual on this forum

LMAO Mr Doyle, stop it please, sides splitting:
 
"However we believe the reshaping of the world following the financial crisis has implications for New Zealand that will challenge policy makers to think creatively,"
 
LMAO,  harrrharrrrraa, NZ "... policy makers to think creatively,"
 
Yeah right. Dream on Mr Doyle, however, nice try, good on y', see here:
 

http://www.interest.co.nz/news/61149/key-joyce-why-subsidising-kawerau-newsprint-mill-not-good-economics-reflects-flexible-eco#comment-705722
 
 
 

Just heard Rod Oram on RadioNZ
To paraphrase he believes Bill English is still living in 1990
Worth a listen.

They all are. Labour included. Rogernomics and neo liberal economic theory should be dead and buried by now. I have quoted this paragraph from Hugh Fletcher in 1998 before but will do so again because it absolutely refutes the hands off market based rubbish this govt is still spouting 12 years later. NZ has done everything according to the neo liberal/IMF prescription, opened itself defenceless to be plundered by all and sundry who have not done likewise and laugh at at our stupidity. Wise up you morons! You represent NZ citizens and businesses not foreign capital.
 
“In the 15 years since the Lange government was elected and New Zealand opened up to the forces of globalisation, we have performed dismally, both economically and socially….Prospering in an age of globalisation requires us to determine simply and clearly what is really important to us, and then to focus on insightful and unconventional strategies which will deliver success on these matters. That requires us to exploit not only the spirit and drive of competitive individual entrepreneurship but also the power of co-operative endeavour. Both must be harnessed to make New Zealand residents the ‘owners’ of unique capabilities, so that overseas customers and capital are dependent on us.”
 

Certainly Bill's haircut suggests he's living in 1990.

"The model of the last 30 years is broken. Fiddling with band aids won’t fix it. At what point do you admit the experiment just hasn’t worked for New Zealand and won’t be solved by fervent repetition of ideological clap trap? We need to be open to fresh ideas and not allow the debate to be framed by the same elites."
 
http://unframednz.wordpress.com/2012/06/17/time-to-put-rogernomics-to-sleep/

The last sentence made me laugh...
 
"Currently, we feel the response of both the RBNZ and Government is too passive."
 
You have to be awake to be pro-active.  Yet to see any sign that the RBNZ or the Government have got them selves out of the 1980's

Bernankes speech - unlimited printing what will it lead too?
 
http://www.federalreserve.gov/mediacenter/media.htm

As the header suggests,there are two parties that need to review their policies both the RBNZ and the scullery maids in the Kitchen cabinet.
The RBNZ needs to examine the tools to curb housing fueled boom bust cycles such as Lending value ratios for investment lending etc.
The Govt in addition needs to review the wht regime for non resident short term investment,and realign (an inverse cascade) that rewards long term investment wht it could be zero summed.
Secondly the Govt needs to realign the investment sector,from housing to other more sustainable ( and productive ) investments.
This was part of the Savings working group eg.
Private-sector debt is a major component of NFL. The largest component, housing debt, is primarily driven by house prices. Furthermore, the new capital requirements of an increasing population boost private-sector debt. Policy changes that could reduce the level of private-sector debt are:

  1. Reducing the tax distortion that favours investment in housing over KiwiSaver, superannuation and simple saving products, thus reducing the bias that keeps property prices high and lowering aggregate housing debt.
  2. Reducing net migration flows and their year-to-year volatility. This should reduce shocks to house prices and thus total housing debt, and reduce the growth of private-sector debt overall.
  3. Unsustainable booms increase borrowing and debt accumulation, usually with adverse consequences for the whole economy. Policy action to reduce borrowing is an option for increasing saving and wealth on a more sustainable basis and should be considered (including higher prudential ratios against mortgaged lending during economic expansions).

Persitent tinkering is the foremost problem ie trying to cure the symptoms,when the underlying problem is the policy itself.
 

Key & Joyce have said this week that its all tinky boo.  The currency is exactly where it should be, & the "right" industries will thrive, because of the perfect market economy that we live in.
http://www.interest.co.nz/news/61149/key-joyce-why-subsidising-kawerau-n...
Nothing to see here, move along
 

 
Good on you Winston Peters
"Winston Peters' member's bill to amend the Reserve Bank Act will be voted down at its first reading today but it has helped ignite debate over whether the act's focus on fighting inflation is now damaging the economy.
Mr Peters' bill would mean that rather than primarily focusing on controlling inflation, the Reserve Bank Governor would also have to consider the rate of economic growth, including exports, the value of the dollar, and employment when setting interest rates with the official cash rate (OCR)."
 
http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10834988