'Incompetent' Brash crucified exporters - Cullen

By BRIAN FALLOW

Finance Minister Michael Cullen has accused former Reserve Bank Governor Don Brash of "monetary policy incompetence" which "crucified" exporters in the mid-1990s.

"A refusal to tighten early enough in 1993 led to an excessive tightening subsequently, which led to a lot of appreciation in the exchange rate and the crucifixion of the tradable sector," Cullen said.

Brash, now a National list candidate, has long admitted that policy mistake.

Cullen, releasing Labour's economic policy, said that in negotiating a new policy targets agreement with the new governor, yet to be appointed, the inflation target band of 0 to 3 per cent would remain.

However, he would "ensure that the revised policy targets agreement is expressed in a way which makes clear Labour's intentions with respect to the flexible management of monetary policy, consistent with the maintenance of price stability, so as to be supportive of maximising sustainable economic growth".

Cullen said the bank's position was that the only response to an output gap problem (where demand is outstripping the economy's capacity to supply) was an inflationary response.

"Of course you won't see an investment response, because people will be scared off.

"If you are an exporter and your understanding is that as soon as the economy starts growing reasonably strongly you are going to face a very substantial appreciation against the Australian dollar, then you won't engage in new investment. You will be very risk averse."

That meant the bank's position would be a self-fulfilling prophecy, he said.

Increasing the rate of productivity growth was the best way to improve confidence that the sustainable non-inflationary growth rate had increased.

"Labour will initiate discussions between business, unions and relevant Government agencies to identify ways to lift the rate of productivity growth and to monitor and measure changes in productivity," Cullen said.

Bank of New Zealand chief economist Tony Alexander said it was wrong to blame insufficient business investment in the past 10 years on the actions of the Reserve Bank.

"It could just be that businesses took the easy route of hiring more people instead."

Alexander expects the present tight labour market to persist.

"This means businesses need to remain focused on investment in plant and Machinery, upskilling of their existing employees, and hiring people they will have to spend more time training than has been the case in the past decade. Investment in productivity-enhancing technology will be vital."

Brash said Cullen was trying to have his cake and eat it.

"He can't both accuse me of being too slow to tighten in 1993, with the consequence that later policy had to be very tight to keep policy in target, and accuse the bank of tightening too quickly this time."

Cullen was asked whether the bank would have acted differently in the past few months if it had shared his understanding of the policy targets agreement.

It might have acted more like the Reserve Bank of Australia, he said.

The Australian bank has raised rates twice this year, the Reserve Bank of New Zealand four times.

Brash said Australia's circumstances were similar to New Zealand's, but not the same.

Deutsche Bank chief economist Ulf Schoefisch expects the wording of the policy targets agreement to be changed to instruct the Reserve Bank to use the full width of the 0 to 3 per cent band to achieve "flexible management of monetary policy".

"In practice that would mean aiming for inflation outcomes above the 1.5 per cent mid-point, which suggests that average inflation outcomes will be marginally higher in future.

"We would have preferred the clean approach of explicitly changing the inflation target range to, for example, the Australian definition of 2 to 3 per cent," Schoefisch said.

Brash said the present language gave the bank a lot of flexibility - "and we have used it".