Business unhappy as Goff abandons policy on bank

Phil Goff. Photo / Greg Bowker

Labour's repudiation of the framework the Reserve Bank operates under has received a frosty reaction from the Government and business groups.

Opposition Leader Phil Goff was a member of the Government that 20 years ago passed a Reserve Bank act that gave the bank the primary objective of price stability.

Since then there has been bipartisan support between Labour and National on the monetary policy framework.

But in a speech to Federated Farmers yesterday, Mr Goff walked away from that consensus, saying the status quo was no longer delivering what the economy needed.

Interest rates were too quick to go up when inflation rose, he said, and when they did it had the perverse effect of attracting inflows of foreign money - pushing up the exchange rate and hurting exporters in the process - only to be lent out and cause even more inflationary pressure.

Labour is not offering an alternative approach and is unlikely to before election year, 2011. "We will spend probably the next 12 to 18 months working on this, with an open mind. We will look at what is happening in other countries," he said.

If there were easy answers to this they would have been done, he said.

"Our problem has been that because of the consensus we haven't allowed ourselves to think about what the options might be."

Finance Minister Bill English said Labour when in power had initiated several reviews of the monetary policy arrangements including the 2001 Svensson Review and a select committee inquiry which reported last year.

Both recommended only minor changes to the status quo.

"This time around I think they're just trying to get attention," Mr English said.

"The high New Zealand dollar is a hangover from too much borrowing, too much consumption and too much government spending. So we're getting on to influence the things we can to get exporters investing again."

Employers and Manufacturers Association chief executive Alasdair Thompson said Mr Goff apparently wanted lower interest rates, a lower and more stable exchange rate and low inflation.

But Mr Thompson questioned whether you could have all three at once on a sustained basis.