Labour leader Phil Goff says the International Monetary Fund's suggestion that inflation targets should be raised has reinforced his party's decision to challenge existing monetary policy.Mr Goff said in November a Labour government would reconsider monet
Labour leader Phil Goff says the International Monetary Fund's suggestion that inflation targets should be raised has reinforced his party's decision to challenge existing monetary policy.
Mr Goff said in November a Labour government would reconsider monetary policy and look for ways it could be improved to meet the country's economic needs.
The IMF paper, released today, says the 2 percent inflation target chosen by most central banks was sufficient "in a world of small shocks" but it limited the effectiveness of monetary policy during the international financial crisis.
It said policy makers should carefully revisit the benefits and costs of inflation, recognising that large adverse economic shocks could still happen.
Mr Goff said the Government had "a closed mind" on monetary policy.
"The IMF report says inflation targeting is a necessary but not a `sufficient' tool for economic stability," he said.
"The report reinforces Labour's decision last November whether to challenge whether existing monetary policy adequately meets the needs of exporters and New Zealand."
Mr Goff said the Government attacked Labour for its decision but the IMF report supported the view that it was foolish and short-sighted for a country with an export-led economy like New Zealand to rely on a single monetary policy tool that did not provide the stability exporters needed.
"In developing new monetary policy, Labour will study the various options in the IMF report," he said.
"No one option may work by itself. For example, exchange rate targeting works best for countries with large foreign reserves.
"The fact remains that as an export economy, exchange rate stability is vital for New Zealand."
Mr Goff said the 1989 Reserve Bank Act that set an inflation target was a response to a decade and a half of double-digit inflation.
"It was a necessary response to the economic conditions of that time. But economic management also needs to evolve to tackle new problems and one of these has been the challenge high interest rates and an over-valued exchange rate have posed to our export industries."
Bank workers' union Finsec said the IMF report seriously questioned the basis of current policy.
"The 1980 Roger Douglas model of monetary policy focused solely on interest rate setting to lower inflation is long overdue for review," said Finsec spokesman Andrew Campbell.
"Our fluctuating exchange rate, inadequate financial sector regulation and high unemployment could be better addressed through targeted measures."
Mr Campbell said all New Zealanders could benefit from a change.
"The current system puts ideology ahead of positive outcomes. Modern thinking and fresh ideas are urgently needed."
