New Zealand Labour Party

Government needs to show leadership in reviewing monetary policy

The Reserve Bank’s struggles to meet its inflation target, the rising exchange rate and the continued housing crisis shows current monetary policy needs to be reviewed - with amendments to the policy targets agreement a bare minimum, says Labour’s Finance spokesperson Grant Robertson.

“Reserve Bank Governor Graeme Wheeler today released a speech that emphasised the continued importance of inflation targeting. There is no doubt that controlling inflation remains important to the stability of the economy, and a central activity of the Reserve Bank. However, the evidence is clear that this is not sufficient for monetary policy here or overseas to manage changing global economic conditions.

“Whatever the future holds for monetary policy the current Policy Targets Agreement signed between the government and the Bank has one priority – to ensure inflation is between 1 – 3 per cent, with a focus on the mid-point of two per cent. The failure to meet this target for an extended period - and forecasts that the mid-point will not be reached for seven years – seriously call into question the agreement.

“Current interest rate settings are helping to push the dollar to nearly its highest point this year – hurting our hard pressed exporters and slowing the economy. It is time to review monetary policy to ensure it is relevant in the modern world.

“It is absolutely true that the Reserve Bank cannot manage the economy on their own. In his speech Graeme Wheeler highlights the difficulty he has in further cutting the OCR with a housing market that is out of control. The government’s abject failure to manage the housing crisis is a major issue for the economy.

“The Reserve Bank Act is almost 30 years old. The world has changed hugely since then. It is clear from evidence overseas that our monetary policy targets need to be updated to adapt to the ‘new normal’ of low inflation and stalled growth.

“A review needs to consider widening the focus of the Bank to take factors such as the exchange rate, employment, wages and the overall health of the economy into account when setting the OCR and making its policy decisions.

“Bill English is the person who changed the Reserve Bank Act to introduce a mid-point target. He is responsible for the Policy Targets Agreement. He needs to step-up and lead the discussion on these issues,” says Grant Robertson.