KEY POINTS:
Reserve Bank Governor Alan Bollard says his monetary policy is working - and the five major trading banks agree.
The finance and expenditure select committee is carrying out an inquiry into monetary policy due to concerns about the impact of rising interest rates and the high dollar's impact on exporters.
But Dr Bollard today told MPs assertions that monetary policy was not working were untrue.
Export volumes had continued to grow in recent years despite a high exchange rate and inflation had been kept below the upper end of the target band despite the economy enjoying its longest ever uninterrupted boom.
Dr Bollard said it was true monetary policy was taking longer to have an effect, but that was due to a highly unusual set of circumstances -- high commodity prices, a massive housing boom and an excess of global investment funds.
The effects of recent Official Cash Rate (OCR) rises were now being seen in housing data that suggested prices were tapering off.
Reserve Bank board chairman Arthur Grimes told the committee New Zealand's monetary policy framework had been adopted in about 20 similar small open economies and was considered best practice.
It was worthwhile considering supplementary alternatives to the OCR to ensure the Reserve Bank was being as effective as possible, but it was important to note they had not been introduced in other countries as most came with considerable "fish hooks".
"The message I would like to leave with you, is avoid tinkering unless you're pretty sure, almost certain in fact, that tinkering is going to benefit."
The five major trading banks -- ASB, ANZ/National, BNZ and Westpac -- which jointly put forward their views to the committee, agreed with Dr Bollard that monetary policy was working.
But BNZ economist Stephen Toplis said he believed the Reserve Bank had made the mistake of not tightening monetary policy harder as quickly as it could have.
It was more important to look into the lessons that could be learned from that, than looking at potential changes to the monetary policy framework.
Westpac chief economist Brendan O'Donovan said one change that would assist Dr Bollard would be giving the Reserve Bank a fixed 2 per cent inflation target rather than the 1-3 per cent target band it currently operated under.
Mr O'Donovan said instead of changing monetary policy the Government should be focusing on boosting workplace productivity which had declined from about 2.6 per cent in the late 1990s to around 1.2 per cent recently.
A slight increase in productivity would dramatically reduce inflationary pressure, he said.
He believed the main barrier to increased productivity was high tax rates which took money potential investment money away from small businesses and reduced incentives for employees to work more.
Last week Business New Zealand, Federated Farmers and New Zealand Chartered Accountants also called for the retention of the existing framework.
They also called on the Government to focus on boosting productivity, market competitiveness, reducing regulation and reining in spending.
- NZPA
