In many respects it is a real shame that the global economic and financial crisis has come along in 2008 to disguise and overshadow the real causes of the current economic recession in NZ. The overly tight monetary policy approach in 2005 to 2007 caused the recession, but the RBNZ have got away Scott-free from any blame or fingers being pointed at them. If the global crisis had not occurred when it did, I suspect there would be considerably more scrutiny on the RBNZ's handling of monetary policy and less acceptance of the patsy report on the monetary policy framework enquiry.
The Wellington vested-interest groups (RBNZ, Treasury, bankers) ensured that there was no change to the monetary policy framework and that the status quo is the preferred option going forward. The RBNZ monetary stance in 2005/2007 inflicted a high level of damage on the productive and manufacturing export sectors that we are now seeing the results of (factory closures and job losses). Unfortunately, the accountability and transparency of responsibility will never be sheeted home to the RBNZ as global events have overtaken the affects of this major policy error. I still contend that Government charges and energy prices should be excluded from the RBNZ's inflation targets, as they cannot control these price changes through interest rate policy. The economic cost of the current very blunt approach has been large, and in my view it is not acceptable. The world has changed considerably since the inflation targeting regime was established. The global economic and financial crisis has told us that former paradigms are out of the window in the new global economic order we find ourselves in. It looks like inflation will not be a problem for a couple of years from here, but when the next upswing comes there has to be better way of controlling the real sources of inflation than just crucifying our exporters again. Let's hope some lessons have been learnt and we just do not accept the Finance and Expenditure Select Committee conclusions that the current monetary policy is working well and does not need any adjustment. --------------- *Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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