KEY POINTS:
The monetary policy framework isn't broken - fix other things instead.
That was the common refrain of business lobby groups to Parliament's finance and expenditure select committee yesterday.
But Auckland University economist Stephen Poletti said that in a world of big international capital flows the regime's sole focus on inflation and reliance on interest rates as its only tool was "just madness".
Federated Farmers, the Institute of Chartered Accountants, the Chamber of Commerce and Business New Zealand all urged the MPs in effect to leave the Reserve Bank and the rules it operates under alone and focus instead on impediments to growth on the supply side of the economy.
"If the Government gets its economic settings in order, the Reserve Bank will have a much easier job," said Federated Farmers vice-president Don Nicolson.
Pressed by Labour's Paul Swain to say what areas of Government spending should be cut, Nicolson said, "Why is welfare spending growing so fast when the labour market is strong? And surely the accommodation supplement underpins the housing market."
Wellington Chamber of Commerce chief executive Charles Finny said, "High interest rates are a signal that we have poor policy full stop."
The Government needed to look at the extent and quality of its spending. "If there's a silver bullet it's there, not in voodoo solutions."
Changing the bank's inflation target band from 0-2 per cent to 1-3 per cent had been part of the problem and should be reversed.
Business New Zealand chief executive Phil O'Reilly recalled appearing before a select committee inquiry into Auckland's 1994 water shortage crisis. Submitters had struggled to be heard over the the downpour hitting the roof.
He likened that to the present monetary policy inquiry, which had been set up when the dollar was threatening US80c. It has since fallen more than 12 per cent both against the US dollar and on a trade-weighted basis.
"The market has moved faster than the political process ever could," O'Reilly said.
"The focus should be on policy settings affecting productivity in the medium to long term."
Auckland University's Poletti said that if you were interested in productivity growth the last thing you needed was to keep the cost of capital high.
The wedge between New Zealand and overseas interest rates had seen huge speculative flows of money into New Zealand, destabilising the exchange rate.
That money flowed into the housing market and consumption, triggering higher interest rates and completing the vicious circle.
"This cycle will eventually unravel but it will do a lot of damage in the meantime."
The Reserve Bank's inflation target should be relaxed, Poletti said.
"It does not make sense to tightly control only one indicator when the result may be that other equally important indicators swing wildly."
He suggested the bank should also have explicit targets for the exchange rate, the current account deficit and even environmental sustainability, such as carbon emissions.
Council of Trade Unions economist Peter Conway said the Reserve Bank's official cash rate should not have to carry the whole burden of addressing house price inflation.
The CTU suggests a capital gains tax, stamp duties, ring-fencing the losses from rentals and a mortgage levy on investment housing and owner-occupied housing above the median price.
National's deputy leader, Bill English, asked, "Why are you focusing on housing so much?
"This framework has worked well for your members: real wage increases, asset prices have risen, by and large inflation has been under 3 per cent and, if anything, the problem has been that credit has been so cheap.
"So what's the problem again?"
Conway said the issue was the effect of such rapid house price inflation on people outside the ranks of homeowners.
"We would much rather see workers' consumption rising because of higher wages than because of a housing bubble."
RATES WIDEN IN JITTERY MARKET
The gap between the official cash rate and 90-day bank bill rates has widened to 60 basis points - two or three times the normal spread.
And as banks become wary of lending even short term to each other, their appetite for Government securities has risen, leading the Debt Management Office to bring forward to today a $250 million bond tender which had been scheduled for next Thursday.
Last Monday's tender of three-month Treasury bills was $250 million, $50 million larger than the previousone.
"There's a lot of nervousness out there," said ANZ National Bank chief economist Cameron Bagrie. "Everyone is holding on to cash."
