By Pattrick Smellie
A Labour-led government would require the Reserve Bank to target the exchange rate to help exporters and allow “more aggressive” intervention by the central bank to “catch out” currency speculators.
Labour lays out its intention to widen the ambit of the Reserve Bank’s mandate in its bundled release of all its major economic policy planks today.
Most of the policies have already been well-flagged, although Labour’s willingness to move away from a strict monetary policy focus on low inflation to target a less volatile currency has had comparatively little attention.
“Our current policy is not well designed to produce a stable and competitive exchange rate, nor to keep interest rates as low as possible,” Labour’s policy says. “In fact, it operates the other way round.”
Labour would not change the bank’s 1 to 3 percent annual inflation target, saying “the importance of controlling inflation is a lesson of history well understood.”
However, currency market interventions of the kind occasionally seen since 2004 “should be pushed harder”, despite the potential for cost to taxpayers from the Reserve Bank calling on its reserves to defend the value of the New Zealand dollar at a preferred level.
“While this does carry some risk for the Crown, we believe this will be modest,” the policy document says. “By increasing the risk for speculators that the bank will catch them out, volatility will be reduced.”
There would also be explicit representation for exporters on the board of the RBNZ, and it would change its Policy Target Agreement “to include a requirement to explicitly consider the effects of monetary policy on exports.”
In practice, Labour anticipates the bank would use more active control of prudential capital ratios imposed on banks rather than relying solely on interest rates, at times when the exchange rate was being affected by rapid credit expansion.
“The role of prudential ratios is important and needs clearer legislative authority,” the policy says. “Labour will clarify the Reserve Bank Act to ensure the bank is able to use such tools primarily for the purpose of supporting monetary policy.”
While Labour endorses the broader Australian approach to monetary policy, the policy for the RBNZ stops short of including “employment and economic prosperity” in the PTA.
Labour says its economic policy “has been given the tick of approval by the Reserve Bank”, based on the bank’s support for a capital gains tax.
(BusinessDesk)
38 Comments
Well said Labour:
“The role of prudential ratios is important and needs clearer legislative authority,” the policy says. “Labour will clarify the Reserve Bank Act to ensure the bank is able to use such tools primarily for the purpose of supporting monetary policy.”
Cheers, Les.
"..... based on the bank’s support for a capital gains tax."
NZMEA also support introduction of a CGT:
As do a growing number of others who also realise the absence of effective CGT creates imbalance and distortions in the economy:
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10767081
However, currency market interventions of the kind occasionally seen since 2004 “should be pushed harder”, despite the potential for cost to taxpayers from the Reserve Bank calling on its reserves to defend the value of the New Zealand dollar at a preferred level.
“While this does carry some risk for the Crown, we believe this will be modest,” the policy document says. “By increasing the risk for speculators that the bank will catch them out, volatility will be reduced.”
Who gets to decide the preferred level and against which currency pair? Hopefully not the governor of the RBNZ, whose dented pride may lead us to bankruptcy, if one of the big boys decides to take him on. Especially if they happen to the buyer of our never ending issuance of government stock - a vested interest always encourages a defensive posture in those who have little lose other than their job.
Equally, hoping to catch speculators out with NZ taxpayer liabilities is also hopelessly ill- founded. They will just go broke with their and our money as MF Global did. The presumption that sanity prevails in these markets should not be entertained.
All in all Just another recipe for a technocratic led nightmare, similar to that which we are currently witnessing in Europe.
If we were talking about a peg with undervaluation being the major issue I think you'd have an arguement. I think what we are talking about is something much less rigid, even less so than the Singaporean approach. Putting more emphasis on targeting non-tradeables inflation with other approaches and with less movement of the OCR will be helpful, hence my first comment.
http://www.realeconomy.co.nz/223-rbnz_must_explicitly_target_no.aspx
" Tosh & drivel " is being too kind , to this latest batch of idiocy from fools who've never done a days work in the marketplace themselves .
..... scrap the stoopid reserve bank , and the treasury too . Dump these useless leeches . Save the tax-payer a small fortune from bureaucratic hum-bug . Get the feckers into real jobs , producing something of value , for a change .
Because David Cunliffe and his ilk do not bother with history , here's a heads-up : Currency speculators such as George Soros broke the ERM peg on the British pound ...... and hasn't that been a godsend now , that the Brits are not in the Euro-zone . Bravo Sir George , nice work !
'Five Ways to Control the NZ$ and Capital Flows'
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10678518
Those five ideas are every bit as flawed now , as when the author first printed that article in early October .
...... nice work for the bureaucrats , but . Pity that they'll screw it up .
Better to trust the free-market system , Les . Let the speculators have their fun . Ultimately the ebb & flow of supply & demand more accurately pitches the exchange rate and capital flows to where they should be .
.. Pointy heads in their ivory towers will just stuff it up , they always have . De-centralize the economy , then watch things fizz and roar into life .
"Better to trust the free-market system , Les . Let the speculators have their fun . Ultimately the ebb & flow of supply & demand more accurately pitches the exchange rate and capital flows to where they should be".
Gummy,
In the words of J.P.McInroe "you cannot be serious"......
As the previous head of foreign exchange for Merril Lynch for a number of years, Key knows more about foreign exchange than the whole of the public, and the sum total of the public, and export institute, employers federation, unions etc - and its hugely in his interest if he could get the RBNZ to intervene in the foreign exchange markets to influence the exchange rate in NZ's favour.
So why doesn't he ? Perhaps he's spent so many years driving a truck through the exchange rates of economies that have tried that before, that he totally rules it out ? But no, some us, hugely less qualified, still think we know better and congratualte anyone who raise this dribble once again
You'll like this Iain:
http://www.guardian.co.uk/commentisfree/2011/nov/15/money-privatised-stealth?CMP=twt_gu
It'd be great if it had a buying power comensurate with our earning power, but it doesn't. We need to be selling, earning more and buying, consuming less - especially given the debt problem:
http://www.johnwalley.co.nz/151-slip_sliding_away.aspx
'Reserve Bank Currency Claims No Longer Wash'
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10739906
Please tell me how you devalue a currency at any time, let alone such a time when the major players (Yen, Euro, $US) are trying to do it ???
Keep in mind the level of reserve assets the RBNZ actually has.
Problem is the entire Western world (not just us) needs to "be selling, earning more and buying, consuming less - especially given the debt problem".
If everyone tries to do that, it's called a Depression.
You opened with a price based arguement, hence my point. It's not just about reduced margins for the producer, a lower effective price via a reduced and more stable exchange rate results in increased volumes and market share. If we weren't approx. 20% overvalued I could agree with you, see Raf's comments below, plus there is stuff on one of the NZMEA websites about this, a BIS report I think I recall, have a search. We, have room to move, without printing, see my ratios supplementary reply to Raf and Stephen below.
The NZ$ should be trading at least 20% lower than its current value. The whole point of freely floating currencies is that they move up and down to adjust balance of payments imbalances.
This is why fixing currencies can be problematic. So why has this failed?
Because the advent of the yield play....the carry trade in local vernacular...but really a search for yield, excess liquidity and massive leverage.
So the NZ$ has become an investment vehicle for capital looking for a nice high yielding home. We have run a current account deficit for 38 years...perhaps no one has noticed? our balance of payments has been woeful (the last 6 years has a negative balance of $4.2bln notwithstanding the last 2 years of small surplus and record terms of trade).
So why have overseas investors been happy to finance us? The reality is NZ is a nice juicy asset....at the end of the day investors will be happy to take a nice piece of the productive pavlova paradise (excuse the alliteration).
In fact we have already forward sold $150bln worth of assets and every year that will grow unless we do something to turn it around.
National are happy to leave things "to the market". Looking around the world, that doesn't seem like such a smart idea.
Heck its funny seeing those who can't separate their allegiance with the 'Bloods' or the 'Cripps' or whatever gang they belong to! Labour (and oddly the Greens' in second, who'd have thought) have the most realistic, pro-active and potent solutions to the economic issues facing NZ. For example, let's face it, raising the retirement age is the only sane thing to do with our demographic shifts (we don't generally die at 70 any more!), but National are stuck in an old paradigm ("its a u-turn that will damage brand Key') and won't touch it. The Lockeyn era has ended. Anyone who leave their gang pad can see that, and that's why as a past Tory who can see the Tories are past it I am voting Left (Green or red?). If you believe National policy is good, vote for them, but if like three quarter of NZ you can see that a fire-sale in a depressed market of assets that return a great amount tot he economy is stupid, don't vote National because of some silly gang duty.
And this is another good idea- thats what I meant to say!
They would be no more speculator than Singapore's MAS and become a more effective regulator in the process, in particular when given the green light to use other approaches, see comment to Raf below. In one sense they can be the ultimate 'inside trader' - I guess that is where the fear factor is generated.
@Raf - The NZ$ should be trading at least 20% lower than its current value. The whole point of freely floating currencies is that they move up and down to adjust balance of payments imbalances .
I hope you had no skin in the trade Raf.
Should be doesn't count - we keep running cumalative current account deficits because we keep creating fresh NZD liabilities to purchase imports beyond which we export.
Those excess liabilties have to find a home here - hence the strong NZD - it's compounding stupidity.
Lowering interest rates just encourages the profligate to borrow more.
A hike in rates would close it down, but those affected most have captured those empowered to make the changes.
Inverted yield curves, have a happy knack of killing carry trades and just about all else associated with finance.
Equally, foreigners have little interest in financing government deficits unless, the curve is steep. Keep in mind they borrow (short term) locally to make their purchases. to avoid outright currency risk - but nonetheless, our banks use their creditworhiness to monetise the government's fill-in borrowing when the local debtors start to look shaky.
Hi Stephen,
Instead of raising rates, why not just raise bank capital ratios and start squeezing the leverage out of the market?
I can understand you argument for inverting the yield curve but I would worry about the impact on the business sector of higher rates at the moment. Also I still don't think we've seen any real debt deleveraging here (apart from the finance companies going boom).
Certainly we need to cut off the credit pipeline and rebalance the capital account before the whole thing goes completely pear shaped. Sadly the government continues to pretend the problem doesn't exist.
@ Raf & Les - Instead of raising rates, why not just raise bank capital ratios and start squeezing the leverage out of the market?
The banks I worked for always calculated their profitability as a return on capital. In the case of my department it was always near 16%.
Higher capital ratios by default would surely demand higher interest rate margins - hence higher interest rate costs to end users.
Agree with Nicholas. I've wittered on about same before on here. There are a variety of ratios that could be used, all the usual crew, plus extras like specifying and varying min % of domestic funding and min % of individual mortgage on floating rate. Simply lining them up on the mantlepiece as the sticks to used if need be, would probably be enough to contain excessive inflationary pressures as the OCR is reduced. This isn't a problem of function, it's a problem of will. It's about this:
http://www.realeconomy.co.nz/223-rbnz_must_explicitly_target_no.aspx
( ... target non-tradeables inflation.)
Stephen makes valid points but let's remember that banks operate under license. Banking could be regarded as a public utlity since banks operate not as financial intermediaries but as creators of the money supply via the credit creation process.
If overseas banks continue to gouge profits and then reptariate those flows (some $3-4bln a year), then we should take action.
It's difficult when our current government tends to supply new board members for the Big Four banks but we should remember who the government works for: the people not the banks.
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