Have your say: Labour's Goff abandons consensus on RBNZ monetary policy tools

Labour leader Phil Goff announced at today's Federated Farmers conference that Labour was abandoning the political consensus in place since 1989 around the Reserve Bank's single focus on targeting inflation, but supported it remaining independent. Here is a link to the full speech. Goff starts talking about monetary policy about two-thirds of the way down. Here are Goff's comments on monetary policy:

Another major issue for farmers, and for exporters generally, is the way New Zealand's monetary policy is working. I was pleased that Phil York made a strong submission on behalf of Fed Farmers to the parliamentary banking inquiry Labour helped to set up earlier this year. As he pointed out, total bank lending to agriculture is around $45 billion. That means that every one percent change in interest rates is worth $450 million to the farmers' bottom line. The Inquiry concluded that around half a percent was inappropriately held back by banks from farmers during the worst of the recession. So it called for action on bank supervision, action to level the playing field and action on monetary policy. Monetary policy affects farming in important ways. Farms are heavily exposed to interest rate movements, and even more exposed to exchange rate movements. We export 95% of everything our farms produce. When our exchange rate surges, it undermines the competitiveness of our prices in destination markets. When the exchange rate falls, the price of inputs like fuel can soar unexpectedly. The ideal is a stable and competitive exchange rate. But our Reserve Bank policy targets are not well designed to produce a stable and competitive exchange rate, nor to keep interest rates as low as possible. In fact, it often operates the other way round. When there is a surge in domestic demand, the policy response is to increase interest rates. Ironically, higher interest rates attract even more inflows of foreign capital, which then gets lent out and sometimes causes even stronger domestic demand. So New Zealand's overseas debt increases inexorably, while monetary policy punishes our most productive businesses and first home-buyers - just about the two sectors that we least want to affect. As the parliamentary inquiry into monetary policy showed, the current Official Cash Rate punishes the tradable sector for inflation in the non-tradables sector. Interest rates are quick to go up when inflation rises. The OCR skews investment away from the productive areas of the economy. It is no coincidence that it's been nearly forty years since New Zealand earned as much as we spent overseas. The closest we came in all that time was in 1989 - the year the Reserve Bank Act was passed, the bank was made independent and the single focus on price stability was adopted. In those terms, the Reserve Bank Act has been successful. An independent central bank is now orthodoxy, and it has worked well. We battled inflation successfully. But the battle against inflation is no longer New Zealand's sole or over-riding policy objective. Growth and wealth creation are at least as important. For twenty years since the Reserve Bank Act was passed, there has been a bipartisan consensus between National and Labour over the policy targets and the primacy of price stability. The consensus between us continues on the independence of the Bank. But today I am announcing the end of the consensus around the policy targets and tools of the Reserve Bank. Labour wants to see a step change in our export performance. We want policy that will keep our exchange rate as stable and competitive as possible. We want to reduce interest rates for businesses and home-owners, so that we put more money into the pockets of New Zealanders. Working New Zealanders with mortgages will benefit from policy that tilts the emphasis away from its current sole concern with the holders of wealth, to a focus on creating wealth. Price stability and low inflation will still need to be important objectives for the Bank. We need to guard against people locking in higher expectations of price rises. The way they interact with other objectives will be an important part of our economic policy at the next election. The Reserve Bank Governor told a parliamentary committee last week that the Bank is already looking to use new capital adequacy tools under Basel II to provide countercyclical support to the OCR. The Bank itself is asking questions you have asked. Labour believes they are vital questions and New Zealand needs new answers. We will be studying the options closely. There are a large number of commentators who have useful contributions to make on this issue. As the New Zealand Manufacturers and Exporters Association said this week, New Zealand needs a policy framework that underpins and supports export growth. The system we have causes widespread damage to the tradable sector. This is an important policy area for farmers, and for the performance of our economy overall. I welcome the contribution that Federated Farmers made to the multi-party parliamentary inquiry on banking, and I hope we will be able to work with you as we develop a new monetary policy.