Inflation targeting fails, RBNZ needs to change – Parker

Labour finance spokesman David Parker

BUSINESSDESK: Two decades of conventional monetary policy targeting low inflation have failed New Zealand, which has come through the global financial crisis with an over-valued exchange rate and persistently high balance of payments deficit, Labour's finance spokesman David Parker says.

The Reserve Bank should be looking to copy other countries' central banks to "put grit into incoming capital flows", target a lower exchange rate, and use new tools intended to protect financial system stability to produce better economic conditions for exporters.

The central bank could also benefit from running monetary policy less predictably, since New Zealand's orthodox approach was almost certainly encouraging foreign currency traders to park funds here, strengthening the dollar, in the belief that they fully understand how monetary policy will be run.

'Competitive devaluation'

In the wake of the global financial crisis, the major economies were pursuing "competitive devaluation" of their currencies to kick-start economic activity.

"We ignore this at our peril," says Mr Parker, yet New Zealand and Australia were "sticking with the paradigm" for monetary policy that had been place since the late 1980s.

Mr Parker's comments, in an interview with BusinessDesk, followed meetings in the US and Europe to investigate new monetary policy options.

They coincide with a warning from JB Were's New Zealand head of strategy Bernard Doyle that New Zealand's orthodox approach to monetary policy is hurting exporters at a time when other countries are "breaking all the rules".

Mr Doyle urged the Reserve Bank this week to "lean against the high New Zealand dollar using a blend of creative credit easing and New Zealand dollar intervention".

The growing calls for action on the dollar also coincide with the arrival of new bank governor Graeme Wheeler, a New Zealander who has been working as one of three managing directors of the World Bank in Washington DC.

Signed off this week

Prime Minister John Key said cabinet had signed off Mr Wheeler's new Policy Targets Agreement this week, with "very modest" adjustments. Government MPs are expected to kill a New Zealand First private members' bill seeking a wider mandate for the RBNZ at the first reading today.

Mr Parker also calls for more honesty from the central bank, saying its shortcomings over the past decade should be acknowledged in the same way that successive governors have urged governments to run balanced budgets and pursue competitiveness through micro-economic reforms.

"It really annoys me when monetary policy says it's all everyone else's fault," he says. "Inflation targeters should own up to their mistakes."

The RBNZ had failed to stop the credit boom of the mid-2000s, despite raising benchmark interest rates to a high point of 8.25% before the global financial crisis in 2008.

It should now be given a wider set of objectives, including being allowed to use new macro-prudential tools, which can require banks to lend less and hold more capital on their balance sheets, not just for financial stability reasons but to make the economy conducive to entrepreneurs and exporters.

While inflation could not be allowed to get out of control, "we have to say their primary function is not inflation-targeting".

Speaking to BusinessDesk earlier in the week, Mr Doyle drew a distinction between a central bank intervening to try and strengthen a currency and seeking to place an upper limit.

"You're dreaming if you are trying to preserve a floor in the currency," he said, but the Swiss central bank had proven it was possible to set a ceiling on a currency's value.

"It's plain wrong that a central bank can't put a cap on a currency."

This article is tagged with the following keywords. Find out more about My Tags

Post Comment

11 Comments & Questions

Commenter icon key: Subscriber Verified

This is a debate NZ needs to have. It was Bollard who came up with the core funding ratio, limiting lending in NZ to a % of local deposits and longer term lending. This was as a result of RBNZ having to rescue NZ banks with emergency loans, as banks here were caught with long term loans out and only short term international funding for them.

This would have also dampened NZ's exchange rate reducing hot money flows into the country. Alas what did national do - deferred the implementation. What's happening now, another property bubble. Thanks National (sarcasm).

You go David Parker, and keep pushing this.

Reply
Share

Incorrect - The RBNZ never "rescued" the NZ banks with ermergency loans. The government provided a guarantee on wholesale funding - and the banks paid for it - the same money that was eventually used to bailout SCF.

Reply
Share

Take a closer look and you'll find you're incorrect - back in 2008 - RBNZ had to help NZ banks. That's why the core funding ratio came into being.

Reply
Share

wouldn't have happened under labour, which is committed to servicing the deficit, and have done so successfully in the past (although national shills will say the opposite), unlike national which every term rarks up more massive debt with the federal reserve bank/china bank.
what were we thinking back in 2008? maybe we've learned our lesson on who is financially better for NZ...tax and spend? a tired refrain from national, since with them it is borrow and tax and spend.

Reply
Share

The major failure for NZ of the last decade, was the election of the Clark lead government; of which Parker was a reasonably senior member.

Reply
Share

So Mr. Parker wants tro lower our exchange rate ! A weaker currency means reduced buying power for NZ businesses and all individuals. It's the equivalent of a general wage cut, although it would certainly be a bonus for foreigners weanting to buy NZ property and other assets.Something Labour rails against when it suits them. Sorry Mr. Parker, but you will never know as much as the market about the value of our dollar,.

Reply
Share

Parker conveniently overlooks the costs to many New Zealanders from effectively devaluing the NZ dollar, by pushing down interest rates and restricting (controlling) bank lending. People living off their investments will be penalised and the cost of everything will rise as the exchange rate is forced down and inflation rises. New home owners needing bank funding will be forced into a secondary lending market at very high interest rates. We will end up with the sorts of controls we suffered under Muldoon in the 1970s until Labour put in place the current regime in the mid/late 1980s.

Reply
Share

Yes as always number 8 wire in hand little tin pot NZ has the global monopoly on all the workable ideas in economics and finance... the reality is everyone is going to get it in the neck so might as well share it around and that includes 'people with investments', you folks don't have some sort of divine right to protection... it is what it is. Time to get earning, it's the only way and we need to be competitive to do it so let's forget about the purity of theory and do what works in the real world.

Reply
Share

NZ's current account deficit runs continuously back to 1973. Labour had 9 years to address it and used them sacrificing savers for the benefit of borrowers, a legacy it will take a generation to overcome. "A little dose of inflation" is more of the same. Does David Parker need reminding that the housing bubble, property development madness, rampant personal over-leveraging, and non-bank finance industry implosion are all products of Labour's 'stewardship'? There sure is some owning up to be done, just not sure it's due from No 2 The Terrace.

Reply
Share

why not let new ideas come out - labour seriously damaged the economy in it's last tenure - no thinking person could deny it. But they have new people in charge, this guy David Parker is putting forward some new and useful ideas. Give them a shot. We need a competitive political system in NZ

Reply
Share

If Mr Parker thinks intervention to lower the exchange rate is a prudent policy, then I offer him the same contract that <a href="http://lifebehindtheirondrape.blogspot.co.nz/2012/09/will-you-take-my-ex... did to Bernard Hickey</a>.

Reply
Share

Post New comment or question

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.

NZ Market Snapshot

Forex

Sym Price Change
USD 0.7925 -0.0041 -0.51%
AUD 0.9027 -0.0053 -0.58%
EUR 0.6267 0.0002 0.03%
GBP 0.4937 -0.0006 -0.12%
HKD 6.1475 -0.0306 -0.50%
JPY 84.8810 -0.3580 -0.42%

Commods

Commodity Price Change Time
Gold Index 1248.5 1.960 2014-10-21T00:
Oil Brent 86.2 -0.850 2014-10-21T00:
Oil Nymex 82.5 -0.270 2014-10-21T00:
Silver Index 17.5 0.195 2014-10-21T00:

Indices

Symbol Open High Last %
NZX 50 5233.1 5284.3 5279.7 0.00%
NASDAQ 4429.2 4435.9 4419.5 -0.83%
DAX 8934.5 8957.2 8887.0 0.60%
DJI 16615.3 16653.9 16614.8 -0.92%
FTSE 6372.3 6401.5 6372.3 0.43%
HKSE 23300.5 23460.8 23088.6 1.37%
NI225 15038.2 15195.8 14804.3 2.64%