Labour Party leader David Shearer discussed his party's stance on monetary policy with interest.co.nz's Alex Tarrant on TV3's The Nation programme over the weekend.
Watch the discussion in Part One of The Nation in the video above from 3:20.
Below is a transcript of the discussion:
Rachel The other big issue at the moment Mr Shearer is the high New Zealand dollar, and Labour has you know rested much of its economic policy on amending the Reserve Bank Act. How would that work under Labour?
David Well the way that the dollar has gone up, vis-à-vis other currencies has meant that many of our exporters are not doing well. We export to live, and if we export and our exports are doing well, then New Zealand does well. Right now the United States, the European Central Bank, Japan, South Korea, have all effectively devalued their currencies and ours are still very high. It makes it very difficult for our exporters to be able to compete in those sorts of bargains.
Alex Tarrant – Political Journalist
So they’ve all got very low interest rates obviously. So would Labour want to see the OCR lower, would Labour want to do what the United States and ECB is doing and intervene in the foreign exchange markets?
David Well what we've said is that the Reserve Bank Act needs to be amended so that inflation is not just simply the one target, so that we actually broaden that outlook, so it gives the Reserve Bank the ability to be able to take a look at how exports are doing and how our exchange rate is doing.
Alex So you cut the OCR to try and get the exchange rate down, it fuels inflation, what's the right level of those two? Who tells the Reserve Bank that?
David Well it's not for the politicians to run the exchange rate, but what you do need to have is a wider toolbox for the Reserve Bank to be able to make those sorts of judgements, and if they're only concentrating and focusing just on inflation, which was an issue, well it's still an issue – but it was certainly the big issue 15, 20, 25 years ago. But it's not so much the issue today. When you look around the world today how it is we're going to be able to compete, our exchange rate is killing us.
Alex Yeah but basically what Labour's effectively saying is you want them to cut interest rates so that the pressure comes off the funds coming into New Zealand, to try and get the exchange rate right. Isn't that the point of what Labour's saying with their policy?
David Well it may involve the interest rate coming down, but what we are saying is that rather than politicians becoming involved in setting exchange rates, what we are saying is that the Reserve Bank should have more ability rather than the very narrow….
Alex This is exactly what's happening though, Labour is saying we don’t want the exchange rate at where it is on the market level. It's there because of market dynamics at the moment. Labour's saying we don’t want it there for the market dynamics. That’s politicising the Reserve Bank Act again.
David No I don’t think that’s the case. What many people are saying, including the IMF are saying that our exchange rate is overvalued by the IMF at 15%. David Parker has been in the United States recently talking to Joseph Stiglitz, [and] the head of the IMF; A whole bunch of economists who are saying the era of focusing solely on inflation is now over, and we need to be looking at a wider range of economic measures and therefore giving the Reserve Bank the ability to actually take….
Alex They’ve got that ability now. It seems to me Labour just thinks oh just tell them to do it, I mean why doesn’t Labour ask them to do other things as well?
David No, I don’t agree. What we are saying to them under the Act now is that inflation is the primary target, and what we're saying is that needs to be broader.
Alex And now you don’t mind if inflation goes a bit higher if it allows for more employment or growth in the economy?
David No, what I'm saying is, is that inflation is one aspect, but it's not the sole aspect. It was the sole aspect 20 years ago, but today we've got other pressures on our economy, and that’s about exchange rates and actually growing our economy.
Rachel So is this Labour's magic bullet to stimulate the economy?
David No, there is not magic bullet, but this is one issue that we are exploring and putting out there because it is where other countries are going to and we are needing to take real notice of that. Now if you look at many other countries as I said, they are already doing that. This government is currently saying, no were just gonna leave it up to the world market, we're gonna be okay. Well actually that’s not the case.
But coming back to your point, what we need to be able to do, is not only just to focus on, just on exchange rates obviously, but it also is about making sure that we are investing in productive enterprises, and that is run a Capital Gains Tax that we've been talking about. Universal savings so that there's more capital to be able to be invested in businesses. There's a whole series, I mean Superannuation which we're worried about, growing so that it's starting to soak up government expenditure.
Alex That brings up a really important issue as to why the exchange rate is so high. Is because foreign funds have been flowing in to fuel the housing market. Labour says that’s because of a lack of a Capital Gains Tax. That’s got nothing to do with the Reserve Bank does it?
David No, this is what we're coming back to Rachel's point about a silver bullet, there are no silver bullets. There is no silver bullet but there are a series of measures that we can take to readjust our economy and refocus our economy towards productive enterprises rather than speculating ….
Alex And government can take the fiscal and tax settings not monetary policy really, it could be?
David Absolutely, it's not one or the other, it's both. I mean there's a whole bevvy of things that we're able to do. And what we're saying, and what we are very different from where National is going, is National is saying we can't do anything more it's hands off. What we're saying is no no it's not hands off, we can make some big changes, and this is the very big difference between us and National, some big changes around monetary policy, taxation, savings, superannuation.