By Bernard Hickey
In five years of attending Finance and Expenditure Select Committee hearings on monetary policy and financial stability I haven't seen anything like it before.
Members of parliament argued openly in front of the Reserve Bank Governor, spoke over the top of the Governor and the tone of their questions and interjections had a sense of frustration and heat I hadn't seen before.
The hearing broke up with a procedural argument about whether to extend the hearing to ask the new Governor Graeme Wheeler more questions. National refused the opposition parties time to ask more questions.
For me, it was the first public event where two decades of political consensus on monetary policy broke down into the sort of acrimony that suggests the next five years of new Reserve Bank Governor could be difficult.
The consensus ended in policy terms before the last election when the Labour Opposition joined the Greens in talking about changes to the monetary policy framework, which is currently focused on using the Official Cash Rate to target inflation around 2%. Since then they have fleshed out proposals for using macro-prudential tools to manage monetary policy and the exchange rate. They also both favour capital gains taxes
The Greens have also proposed the Reserve Bank use Quantitative Easing (money printing) to buy Earthquake bonds from the government to help fund infrastructure development in Christchurch.
Greens co-leader Russel Norman, Labour Finance Spokesman David Parker and NZ First Leader Winston Peters peppered Wheeler with a range of challenges to his views on monetary policy, the exchange rate and Quantitative Easing. The opposition parties have joined up in more concrete ways in recent weeks to challenge the government and the Reserve Bank over the current monetary policy framework and settings that are associated with a currently high exchange rate. The opposition parties have called for a parliamentary inquiry into the decline of manufacturing sector jobs in recent years because of a high currency.
Wheeler repeated the views he detailed in his maiden speech on October 26 that Quantitative Easing was an act of desperation and the best he could do was use the OCR to keep inflation around 2%.
Asked about Quantitative Easing for New Zealand, he said: "We don't think that that's something that deserves serious thought at this point and there's plenty of room to use interest rates."
Asked about the use of QE elsewhere, he said: "Where they are is a sign of desperation in the United States, Japan and Europe."
Wheeler spoke about the exchange rate in an almost academic way about how the New Zealand dollar had become somewhat disconnected from commodity prices. He said he saw few factors that would lead to a significant depreciation in the New Zealand dollar any time soon, which he accepted.
Wheeler's restatement of his monetary policy orthodoxy increasingly frustrated the opposition members as the hearing went on. Wheeler's comments appeared more orthodox than those of his predecessor Alan Bollard.
The new Governor faces an uncomfortable five years and real uncertainty about being reappointed for a second term if a Labour/Green/NZ First coalition was to win an election due in 2014.
If the opposition persisted with a push to change monetary policy, it's now clear they would have to do it through changes to the Reserve Bank Act and the consequent removal of Wheeler, who has showed himself embedded into and wedded to the 1989's Act focus on pure inflation targeting and orthodox policy.
Resign or else
Previous attempts to change the Reserve Bank approach have involved changes to the Policy Targets Agreement between an incoming Finance Minister and the Governor. Wheeler's fierce defence of pure inflation targeting and hands-off approach to the currency and macro-prudential policy would make it very difficult for him to agree to substantial change.
Any new government would have to change the Act itself.
Given the clash evident at the parlimentary hearing today, that would mean Wheeler would have to resign or change his orthodox approach. Unlike Bollard, who appeared more pragmatic, Wheeler has locked himself into the current path.
New Zealand's financial markets and economy now face an uncertain new landscape where political calculations and a potential clash between the Reserve Bank Governor and a new government shake up thinking on where interest rates and prudential policy might end up.
The consensus around Monetary Policy and an independent Reserve Bank Governor ended today.
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