Current monetary policy framework is sound, Treasury chief says

Friday 21st September 2012

The government's chief economic adviser, Treasury Secretary Gabriel Makhlouf, has waded into the debate on monetary policy and its contribution to the export-sapping strength of the New Zealand dollar, saying the current framework is "sound."

In a speech to a function hosted by the business lobby group, the New Zealand Initiative, last night, Makhlouf said strong prices for New Zealand's export commodities were part of the reason for a New Zealand dollar cross-rate with the US dollar that has remained above 80 US cents for more than year.

"But taking a longer perspective, it seems clear that there is a more persistent relationship between the long-term average level of the exchange rate, New Zealand's high average real interest rates (relative to those of our trading partners), and the persistent gap between domestic investment and savings rates, as reflected in New Zealand's persistent current account deficits."

Those high real interest rates were "not due to monetary policy." "Rather, it seems that these outcomes arise largely out of our domestic savings and investment choices, which in turn are influenced by - among other things - domestic policy settings," said Makhlouf. "I am clear that the current monetary policy framework is sound.

"Instead, where we need to look is at underlying drivers of our economic performance," and how they in turn drive the exchange rate. Makhlouf's comments to the organisation that has replaced the New Zealand Business Roundtable at the economically "dry" end of the public policy spectrum follows a surge in commentary on whether the Reserve Bank of New Zealand's inflation-targeting regime is appropriate when major economies are printing money and intervening in current markets to try and kick-start economic growth.

JBWere's New Zealand strategist, Bernard Doyle, called for action to cap the value of the kiwi dollar, while Labour Party finance spokesman David Parker says New Zealand exporters are suffering as major trading partners engage in "competitive devaluation" while the RBNZ continues to run an orthodox monetary policy approach.

A New Zealand First private members' bill seeking to widen the RBNZ's mandate failed to gain parliamentary support this week. The debate coincides with the handover at the end of September by the RBNZ governor of the last decade, Alan Bollard, to his replacement, expatriate former World Bank managing director Graeme Wheeler.

Makhlouf urged businesspeople to do their share to promote debate about the need for deep, ongoing economic reform to keep New Zealand globally competitive, while criticising the country's tepid welcome for foreign investors. "New Zealand is highly dependent on foreign capital to fund our shortfall in national savings," he said.

"Yet for foreigners deciding whether to invest in our country, too much of what they see and hear from New Zealand risks putting them off." Makhlouf also strongly backed proposed changes to the Resource Management Act, citing the four years and $2.5 million spent by Port of Tauranga to gain approval to dredge new channels to cope with the growing size of international container ships as an example of the need for reform.

BusinessDesk.co.nz

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