Don Brash: Myth of inflation salvation blows from monetary pipe dream

Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell

Your columnist Bernard Hickey often writes articles with which I agree, but he has a real blind spot about monetary policy. Not long ago he was advocating printing money to reduce the foreign exchange value of the New Zealand dollar and avoid the need for so much government borrowing, apparently oblivious to the inflationary effects of such a policy. Yes, other central banks are printing money and buying government bonds, but they are all faced with potential deflation and have already reduced interest rates close to zero.

We are not in that situation by a very long way.

Last Sunday he criticised what he described as our "obsession with strict inflation targeting" and "the theory that low inflation cures all ills". But we've never had a "strict inflation targeting regime" and successive Reserve Bank governors have been willing to ignore the price effects of one-off factors like oil shocks and changes in GST, thereby allowing inflation to rise above the announced inflation target.

And no supporter of the current regime believes that "low inflation cures all ills". It clearly doesn't. Lots of other things are needed.

We need a tax system which encourages productive investment. We need a greater supply of residential land to reduce the upward pressure on house prices and encourage more savings away from property speculation and towards more productive investment.

We need tighter fiscal policy to enable the Reserve Bank to ease monetary policy without letting inflation increase.

Low inflation does not cure all ills. But higher inflation helps nobody (except property speculators). It doesn't even stimulate employment as we used to believe, except briefly by temporarily cutting real wages.

And while printing money or drastically easing monetary policy might get the exchange rate down, we know from bitter experience that this provides only temporary relief for exporters as higher inflation quickly offsets the benefits of a lower exchange rate.

For decades we could compete on international markets with the New Zealand dollar at US$1.12. Now we can't because too often we listened to those who argued for just a bit more inflation.

But I certainly agree with Mr Hickey that the New Zealand dollar is over-valued at present. Unfortunately, that is not something which monetary policy can remedy.

Don Brash, former Reserve Bank governor