By John Walley, chief executive, NZ Manufacturers and Exporters Association
One of the conclusions drawn from the economic crisis that has played out over the past few years has been that a more pragmatic focus has been more successful for central banks. The International Monetary Fund for one has been on record saying that small export focused countries that paid only lip service to inflation control while managing their exchange rate achieved better economic outcomes than those focused on price stability. Certainly price stability came at a massive price for exporters in New Zealand with exports stagnating from about 2004.
Unfortunately this shift in the best practice policy focus seems to have been missed by the government and its offi cials in New Zealand. In a recent speech John McDermott, assistant governor of the Reserve Bank, noted the difficulties inflation targeting had imposed on exporters:
“During the boom period expectations of tight monetary policy to offset the excess demand pressure probably contributed to the persistently high exchange rate throughout the period, causing considerable discomfort and worries about the sustainability of parts of New Zealand’s tradable sector.”
Yet the conclusion was that monetary policy over the last decade was overall a success: “The Bank’s analysis on the recent business cycle underscores that the inflation targeting framework is an effective way to conduct monetary policy under a range of testing circumstances and that the framework is a useful tool for future inflation control.”
The success or failure of the Reserve Bank cannot be measured solely on inflation.
If we were to default on our debt like the Greeks would inflation between one and three percent still be a success?
The Policy Targets Agreement between the minister of finance and the governor of the Reserve Bank must be changed to include measures of export growth.
This is the missing piece of the puzzle for New Zealand, and only export success will bring the growth that is necessary to relieve the debt problems we face.
There also does not seem to have been any lessons learnt from the housing boom from 2002 to 2007. We are starting to see the same 95 percent loans offered by banks that blew up New Zealand’s debt bubble last time around. The same asset weighted capital reserve ratios that existed then are still in place now, encouraging asset backed debt over business lending. These macro settings could be changed to have the same effect as loan to value ratios at the retail level.
The decisions we are seeing from the Reserve Bank are a result of a lack of connections to the real economy. The forecasts underpinning their actions are fairly optimistic and end in the wrong decisions being made even on when to cut the Official Cash Rate. Clearly those building forecasts are out of touch with our trading reality.
With Alan Bollard leaving at the end of the year it is an ideal time to consider some changes. Burying our heads in the sand by ignoring other measures simply serves to deepen the hole we are in.