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A Labour Party-led government will require the Reserve Bank of New Zealand to use changes to the rate of people's compulsory KiwiSaver contributions rather than interest rates to control inflation while taking pressure off the over-valued kiwi dollar.
"Instead of paying more interest on your mortgage, a similar amount of extra savings would go into your KiwiSaver," Parker told an Auckland breakfast briefing where he unveiled the "new tool" that would be added to the ways the central bank already has for inflation control.
"Overall interest rates will be lower and so will our exchange rate" through use of the Variable Savings Rate(VSR), which a policy paper published this morning says will be "investigated" and from which low income earners may be exempted.
"The policy targets agreement will request that the Reserve Bank use this once in a lifetime opportunity to attempt to get underlying (as opposed to cyclical) New Zealand interest rates back to the lower levels charged in our competitor countries," said Parker.
"The PTA would state whether or not it was the government's expectation that over the economic cycle the Reserve Bank variations to the KiwiSaver rate would be neutral."
Labour would also shift the RBNZ's inflation targeting to include achieving current account surpluses to reverse 40 years of the country living beyond its means.
"If New Zealand is to decrease its net international liabilities and do better in growing per capita incomes (particularly for low and middle deciles), greater priority will need to be given to achieving growth in its foreign exchange earnings or saving sectors."
Parker said "nowhere currently" used a VSR system, but that moving all New Zealanders into compulsory KiwiSaver at an increased rate of contribution would reduce inflationary pressure during the transition phase anyway.
"This is the perfect time to do this," he said.
Labour would raise the current 6 percent contribution rate to 9 percent (paid 50/50 by employee and employer) over time. The rates at which a VSR might be set are not discussed, although limits to the extent of variation in savings rates might be part of the PTA.
The RBNZ would not have the ability to deploy the VSR unilaterally. It would have to recommend its use to the government and require agreement on a case by case basis.
"Higher interest rate payments are lost to the lender, with much of it heading overseas, whereas savings would belong to the saver," Parker said.
To reflect a new emphasis on improving the country's external accounts, the Reserve Bank Act would be amended to "maintain stability in the general level of prices in a manner which best assists in achieving a positive external balance over the economic cycle."
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