Monetary Policy reform needed to rebalance our economy

It is good to see Phil Goff and David Parker start to flesh out the intent to reform monetary policy signalled late last year, says the New Zealand Manufacturers and Exporters Association (NZMEA).

Early this year we saw the International Monetary Fund conclude that small open economies; big on the rhetoric of single lever (interest rates) single target (near term inflation), had done far better than those that implemented such single minded policy for real.

The one lever/one target approach has exacerbated distortions in the New Zealand economy. Investment has flowed to inflate one of the biggest asset bubbles on the planet, and production and productive efforts have been disregarded as we celebrated the fast buck economy with a consumption party.

Labour has picked up on the fact that other export exposed countries, which placed exchange rate stability as the central focus of their monetary policy, have achieved significantly higher long run economic growth. It is well past time New Zealand followed their lead.

NZMEA Chief Executive John Walley says, ‘David Parker’s speech has shown that things can change, and that on reflection the policy settings we are clinging on to are not world’s best practice after all. We saw from Bill English in the 2010 Budget lots of rhetoric around economic rebalancing but little else. Labour stating at this point what they will do, what they will not do and that they have not decided is a real step forward.”

“Too many elections in New Zealand have been characterised by the major parties seeking to stand on the same spot. Monetary policy might not be as sexy as headline tax cuts but is fundamental to any real economic rebalancing. Wealth transfers from the trade exposed sector have to stop before it is too late, many farmers and manufacturers are close to the end of the road.”

“If the cycle of falling investment leading to a loss of productivity continues expect fewer jobs and falling comparative living standards. For New Zealand to do better in the medium term the trade exposed sector must get a better deal- the key part of that deal is a trade biased exchange rate we have earned, not an exchange rate floating on the froth of speculation.”

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