KEY POINTS:
A strict inflation target for monetary policy makes cashing in on the New Zealand dollar too easy for currency speculators, says NZX chief executive Mark Weldon.
Appearing before Parliament's finance and expenditure select committee monetary policy inquiry yesterday Weldon argued that adopting a dual inflation-and-growth mandate like the US Federal Reserve's would make it harder for the market to figure out what the Reserve Bank would make of the latest piece of economic data. The status quo provided a kind of insurance for currency traders.
"If the bank was explicitly charged with taking long-run output growth into account its behaviour would be less predictable."
In the exchange's written submission to the committee, Weldon cited international research which found that in inflation-targeting countries economic data that was bad news for inflation tended to push up the exchange rate.
"In an environment such as exists today, with the consumer price index near its ceiling, it is rational for the Reserve Bank to run a high interest rate, high exchange rate policy as that will keep imported inflation to a minimum," he said. "Structurally this may be exactly the wrong thing for the long-run welfare of New Zealand."
Weldon also questions whether the present structure allows the bank to take enough account of something like the risk of a housing market crash.
"The consequences on long-term GDP would be expected to be a recession of at least four years. This risk is unacceptable but the narrow CPI target is pushing us ever closer to this situation," Weldon said in his written submission.
Asked yesterday how likely that was, he described the risk as "reasonably material" in light of how leveraged household balance sheets are, the high concentration of wealth in housing, and the "stickiness" of mortgages with the preference for fixed over floating rate loans.
Peter Talley of Talley's Group told the MPs he used to wake up every morning and pray that the Reserve Bank would cut interest rates.
But he had come to the conclusion that the dollar was not going back to US55c - its average over the last 10 years.
"Its obvious you can't control it [the exchange rate]. There are too many outside influences. New Zealand has just got to live with a high dollar," Talley said. That meant it was critical that the economy was competitive in every other way.
Helpful measures would include lower taxes, faster depreciation of plant and machinery, a Productivity Commission like Australia's and an end to Toll's stranglehold on rail haulage. "There's too much complacency. Every day we have people telling us they are off to Australia, especially skilled people," he said.
"At the moment the only way a family can have a decent life is to have two people working and borrow up to the eyeballs from those greedy banks."
PSIS chief executive and former National Bank chief economist Girol Karacaoglu advocates the Singaporean model of managing the exchange rate rather than interest rates as a better means to the end of price stability.
A managed float - in which the dollar is traded against selected currencies within parameters set by the central bank - was similar to currency union, but with a group of countries not just one, he told the select committee.
"Most of our trading partners manage inflation well so a managed float locks us into a low-inflation world," he said. "At the moment every time the world feels good about itself it climbs into the New Zealand dollar and the export sector is shocked."
A managed float was not the whole answer to efficient control of inflation, he said. That would also require far better co-ordination between monetary policy, fiscal policy, labour market policy, and other elements of Government policy which at the moment exist in separate silos.
