Business NZ wants status quo for RBNZ's inflation target

By NZPA

Friday 23rd August 2002

Business New Zealand wants the Reserve Bank's inflation target, to be negotiated by new governor Alan Bollard and the finance minister, to remain between 0-3 percent.

However, Business NZ chief executive Simon Carlaw said his group wanted the Policy Targets Agreement (PTA) to average the inflation rate over a longer period.

"There's no reason to change those numbers (0-3 percent)," Mr Carlaw told National Radio today.

"What is reasonable to change ... is the bank move from an implied 12 month focus to a medium-term focus, to move towards much more recognition of the business cycle in application of the 0-3 percent range," he said.

"You're using a blunt instrument called monetary policy that has one or two very good uses, the principal of which is price stability to underpin growth, but it's not much good at doing other things."

Treasury Secretary Alan Bollard, a bank outsider and considered a moderate, was conditionally appointed Reserve Bank governor yesterday.

Finance Minister Michael Cullen said Dr Bollard's appointment was conditional on negotiating a new PTA, which he expected by the end of September.

Mr Carlaw said Dr Bollard had a good insight into the economy from his previous appointments.

Dr Bollard has been with Treasury for 4-1/2 years and before that chaired the Commerce Commission and headed the New Zealand Institute of Economic Research. Other possible contenders for the job were acting Governor Rod Carr, two former deputy governors, Peter Nicholl and Murray Sherwin and the bank's chief economist David Archer.

"The key to it is communications. I believe it's one of the most complex communications jobs in the country, all parts of the economy to him and he to all parts of the economy," Mr Carlaw said.

Council of Trade Unions economist Peter Conway preferred to see the inflation band tighten, to 1-3 percent or even 2-3 percent.

However, he agreed with Mr Carlaw that the inflation rate should be viewed over a longer period.

"I think the third thing is that the PTA has to make the word stick, because in 1996 we had references to sustainable economic growth, and in 1999 it talked about avoiding unnecessary instability in output and interest rates ... it seems to be one thing getting the words in there and another thing having the effect."

Mr Conway said circumstances were different to those at the entry of previous governor Don Brash, when inflation was much higher and had been a problem for some time.

"This is a risky area, forecasting ahead 18 months as to what inflation might be and trying to adjust monetary policy today," he said.

"I think the risks now lie more towards the downside in terms of the effect of trying to drive inflation too low and squeezing things out, rather than on the upside.

"No-one wants to see it (inflation) persistently above 3 percent. The issue is if you're driving down below 2 percent too hard then what effect does that have on growth."

Mr Conway said Dr Bollard, as head of Treasury, had taken a fairly wide view of the economy, and looked at issues of economic transformation and social development.

"That's a much more balanced approach than what we saw in the past. Also the Reserve Bank in the last couple of years (under Dr Brash) has had a reasonable amount of contact with the CTU. We don't always agree, but at least we've been putting our view in along with other stakeholders in the economy, and we'd like to see that continue," Mr Conway said.

Yesterday, Dr Cullen was reluctant to discuss his views but said "if" the PTA retained an inflation band target it would not be raised above the current 3 percent.

He said the alternative to a band was to aim at a particular number over the business cycle.

National Party finance spokesman and previous RB governor Don Brash warned Dr Cullen to be careful about the signals he sent to finance markets and the public when he renegotiated the PTA.

"Dr Cullen must avoid even the perception of being more tolerant of inflation because of the adverse impact this would have on long term interest rates," Dr Brash said in a statement today.

During the last decade, New Zealand's inflation has averaged about 2 percent, and over the last three years 2.5 percent, similar to that of Australia, excluding the effects of their GST, he said.

Dr Cullen's suggestion the RB should adopt a more flexible approach to monetary policy ignored the conclusions of last year's review, Dr Brash said.

The review, by Swedish academic Lars Svensson, concluded that the RB was following best international practice with its medium-term, flexible inflation targeting.

Dr Bollard said he had been invited by the RB board to apply for the job and had taken it to swap an advisory role for an operational one.

The appointment would take some weeks to complete. First Dr Bollard must quit at the Treasury, then he must negotiate an employment contract with the State Services Commissioner and then a further negotiation must be held with Dr Cullen over the PTA.

Dr Bollard is married to investment banker Jenny Morel, one of the country's leading venture capital specialists, and has two teenage boys.

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