A year ago, the International Monetary Fund (IMF) pointed to the lacklustre performance of those smaller economies fixated on the one lever (interest rates) one target (inflation) approach to monetary policy, now IMF advice is moving towards regulation of capital movements.
New Zealand cannot afford to ignore this advice and persist with the failed purist approach to monetary policy say the New Zealand Manufacturers and Exporters Association (NZMEA).
Late last year a report from the Bank of International Settlements showed New Zealand to represent about 1.6% of the global forex market yet in GDP terms New Zealand is about 0.2% of the global economy- something is out of balance. How does forex trade at some 46 percent of GDP on a daily basis serve New Zealand?
Persistent high interest rates drive this speculative flow to many times that of our trade flows. Exchange rates do not reflect or support export activity and as a result the real economy has gone backwards since 2003.
The IMF explains the problem well:
“Surges in inflows can pose challenges such as rapid currency appreciation and a buildup in financial sector fragilities, such as those stemming from asset price bubbles or rapid credit growth, or the risk of a sudden stop or reversal of inflows.”
NZMEA Chief Executive John Walley says, “This is a great description of a key New Zealand problem. Large capital inflows have caused a high currency and a house price bubble which reduced margins for exporters and starved many of credit.
” When the asset bubble burst in 2008 and the credit supply stopped we had finance company failures, and without the credit influx, the Government struggles to balance its books.
“The effects on economic growth are clear and there are still a number of borrowers sitting on negative equity.
“The IMF details various measures that can be taken such as restricting banks foreign exchange position as a proportion of their total capital and using loan to value ratios to limit demand for credit.
“These are useful measures that many other countries have been using with considerable success. It is time for our Government and Reserve Bank to remove their heads from the sand and take action to support New Zealand’s export economy.”