Guest opinion: Why Labour took the historic decision to challenge monetary policy orthodoxy

By David Cunliffe I believe Phil Goff's announcement today of the end of the major party consensus on monetary policy is historic. It will help shape New Zealand's economic future and the opportunities available to young Kiwis and our kids. The status quo was part of a global consensus that no longer exists. The global financial crisis has helped to wash it away. The change started much earlier. Some people still don't get it. The Official Cash Rate (OCR) was designed to fight inflation, as readers will know, by raising interest rates to cool off the economy (or the reverse as required recently). Over the years it did a pretty good job on that front, but it has been eroded by the growing lags invoved in fixed mortgages, and the failure of banks to pass through changes in full to retail interest rates (see www.bankinquiry.org.nz for more on that). More importantly, acting alone it has not achieved inflation control alongside reasonable stability of exchange rates and money supply. Combined with an imbalanced tax structure, high real interest rates helped suck in hot money that drove the housing bubble.

As interest.co.nz has noted, that was great for banks and baby boomers who already owned houses, but bad for productivity, the foreign debt and younger Kiwis trying to realise their dream of home ownership. The writing is now on the wall: New Zealand has to earn more, export more, save more and be more resilient: combining a sustainable environment and a decent society with a real plan for growth and high skill, high value jobs. Kiwis can't just keep borrowing ever greater amounts of foreign capital, then periodically electing National to flog off what's left of the family silver to cover the debt. Government debt is not the principal problem (although the Nats are planning to massively increase it through pollution subsidies to big emitters). Private debt is. And the way out of that quicksand is more savings combined with monetary policy that achieves a better balance between inflation control, growth and external stability. These are tough problems, and more work is being done to learn from overeas experience and to refine solutions. It is important to note that Labour will continue to support an independant, full service central bank. We will continue to fight inflation and guard against inflationary expectations. There will continue to be an important role for the OCR. But as the recent Banking Inquiry rightly pointed out, the OCR should not bear the whole weight of adjustment on its own, nor can one instrument be addressed at several objectives. Complementary tools are required. We can't expect exporters to thrive with exchange rates swinging from below 50c US to 76c US in less than a year. We can't grow without serious investment in smarts and technology that give us in-country commercialisation and manufacturing capability. And we can't deepen domestic capital markets through an effective tax subsidy to real estate speculation, or a banking system that is 97% owned offshore! Younger New Zealanders now have been whacked with bearing higher superannuation funding costs, massive ETS pollution subsidies and ongoing exclusion from the property market. Labour is on the move to solve these hard problems. Good on you Phil - great speech! ____________ * David Cunliffe is the Labour Party Finance Spokesman