We would widen bank's scope: Goff

Just aiming for price stability is not enough, says Phil Goff. Photo / Mark Mitchell

The Leader of the Opposition, Phil Goff, said yesterday Labour would give the Reserve Bank broader objectives and additional tools to create an environment more supportive of exporters.

In a speech to Federated Farmers in Invercargill he said New Zealand was unusual internationally in having a single policy goal (price stability) for its central bank.

"The Reserve Bank of Australia, in contrast, is required to aim for a stable currency, full employment and 'the economic prosperity and welfare of the people of Australia'," he said.

"I can tell you today that I have already had a bill drafted and ready to go to set the same outcomes for our Reserve Bank."

The bank's independence and inflation focus would not change, Goff said.

As well as broader objectives, Labour would give the Reserve Bank legislative authority to use its prudential powers as the supervisor of banks to support monetary policy, by for example raising and lowering how much capital they are required to hold.

This would allow it to respond better to asset bubbles such as those which had created the global financial crisis, Goff said.

"If the Reserve Bank had better powers it wouldn't need to crunch farmers and other exporters to restrain house price bubbles in Auckland."

But former Reserve Bank Governor Don Brash said Labour's proposals were "very regrettable indeed".

"It is a leap back to a time in the past when economists believed monetary policy could actually deliver faster growth, lower unemployment etcetera in a sustainable way. We now know from the experience of the last several decades that it can't," he said.

"The exchange rate is uncomfortably volatile for the export sector. No question about that. But the reality is you can't fix it by fiddling with interest rates."

New Zealand's monetary policy framework was absolutely orthodox and no different essentially from that in Australia, the United States or Europe, Brash said.

The Australian Reserve Bank Act dates from 1959.

"The Australians still have that legislation hanging around them but quite frankly successive RBA governors I have known well have recognised that they don't have the capacity to target full employment, growth, motherhood, apple pie and everything else."

The Australian equivalent to the policy targets agreement makes clear the primacy of its inflation target: "These objectives allow the Reserve Bank Board to focus on price [currency] stability while taking account of the implications of monetary policy for activity and therefore employment in the short term.

"Price stability is a crucial precondition for sustained growth in economic activity and employment."

Brash said that over the past 18 years the largest trough-to-peak appreciation of the New Zealand dollar on a trade-weighted basis was roughly 50 per cent - "A huge increase, I readily concede, and one which makes life very difficult indeed for the export sector, but no greater than the largest appreciation suffered by the US dollar, the Canadian dollar or the yen over the same period and only slightly larger than the Australian dollar."

And while the Australian unemployment rate right now was lower than New Zealand's, for much of the past decade it was the other way around, Brash said.

Labour's associate finance spokesman David Parker told the Manufacturers and Exporters Association this week that a Labour Government would also change the policy targets agreement to require the governor to consider explicitly the effects of monetary policy on exports.

"New Zealand has a tendency for policy extremes. Other countries achieved control of inflation without interest rates staying higher than international averages over time," Parker said.

But it would not undermine the bank's independence or go soft on inflation.

"This is why we've ruled out a wider target range for inflation.

"We know that inflation can have a devastating effect on the standard of living, especially for those Kiwis on a fixed income who struggle to have anything left over at the end of the week."