Labour outlines monetary policy

Labour would broaden the Reserve Bank's monetary policy targets, adding a requirement to aim for a stable currency, full employment, and the economic prosperity and welfare of the people to its existing inflation target, leader Phil Goff said today.

The opposition would also make it explicit that the bank should use prudential ratios as a monetary policy tool, to regulate banks' overall lending.

"The Reserve Bank Act needs to be clarified to ensure the bank can use such tools primarily for the purpose of supporting Monetary Policy,” Labour's associate finance spokesman David Parker said.

"Labour will make that change. Faced with rapid credit expansion, such as that in recent years, the change would cause the Reserve Bank to use prudential ratios, rather than rely solely on interest rates."

He said the change would help exporters, because it would reduce the bank's reliance on interest rates "while having a moderating effect on the exchange rate".

Speaking to Federated Farmers annual conference in Invercargill today Mr Goff said he had a Bill ready to introduce that would support broader objectives for the Reserve Bank.

"We are in a new economic environment. We are more dependent on our exports than ever before. But our economy is out of balance. We need policy that better supports exports, and better supports investment in job-rich production and enterprise."

He said high interest rates had put export businesses at a disadvantage against overseas competitors, who borrow more cheaply.

"The heavy trade in our currency comes at the price of a highly volatile Kiwi dollar. And the volatile dollar makes the business environment riskier for you and for others involved in export business.

Labour would retain key features of current monetary policy but make some significant changes. "The independence of the Reserve Bank is essential. So too is its focus on inflation. But we will require the Reserve Bank to pursue broader objectives, while retaining our full commitment to price stability." he said.

He confirmed Labour was also looking at greater use by the Reserve Bank of prudential supervision tools to hegulate banks’ capital adequacy.

"In the past, the Reserve Bank has only used this power to weakly control risks to loan books. It hasn’t regulated banks’ overall lending with respect to wider economic risks. This will change. The Reserve Bank can better respond to asset bubbles like those that helped create the global financial crisis. I firmly believe that if the Reserve Bank had better powers, it wouldn’t need to crunch farmers and other exporters to restrain house price bubbles in Auckland."

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