Reserve Bank mandate faces change

VERNON SMALL
Last updated 09:12 18/10/2012

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OPINION: For the first time since the Reserve Bank was given an independent role to ensure "stability in the general level of prices" back in 1989, there is a real possibility of major reform to its mandate.

Not this side of the next election; National has tweaked the policy targets agreement with incoming governor Graeme Wheeler, but made it clear it has no truck with NZ First leader Winston Peters' attempt to amend the 1989 Act.

But the thrust of Mr Peters' proposal to widen the primary focus, adding to inflation the requirement to "maintain an exchange rate that is conducive to real export growth and job creation", is not a bad proxy for the consensus forming among the main opposition parties; a consensus that could become law if there is a change of government in 2014.

Reform along those lines has been a constant in Mr Peters' election campaigning, but he has either lacked the numbers or the will to translate the wish into reality.

There has long been a similar scepticism about the single inflation target in the Labour Party and caucus, especially when Rogernomics was in its heyday.

But during the past two decades it has remained relatively subterranean as the party buried its differences on the matter during the Clark-Cullen government.

While there was never a shortage of sceptics at branch and electorate level, prepared to wheel up resolutions calling for reform, that never leached into any significant opposition expressed by MPs.

Until, led by finance spokesman David Parker, the broad Labour-National consensus was broken by Labour after the 2008 election defeat.

Now with Labour, NZ First and the Greens on about the same page, monetary policy reform is shaping as a significant fault line between Right and Left at the next election, despite Economic Development Minister Steven Joyce's attempt to brush off alternative approaches as snake-oil economics.

It is an argument that has surfaced every time a change has been mooted to the monetary policy framework since 1989; as if somehow it had reached a sort of policy Nirvana that marked "the end of history".

Yet a comparison with the 1989 regime shows how far the framework has evolved; from a 0-2 per cent band with a tight time- frame to a 1-3 per cent range during multiple years.

In his steady if unexciting way, Mr Parker has made considerable headway, including with businesses, with his arguments that the current orthodox regime is no longer useful, when inflation is low, the currency is exacerbating the current account deficit, and while other countries are pushing down their own currencies to New Zealand's detriment.

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His aim is to broaden the act so inflation no longer trumps jobs, the exchange rate and growth. Also in the mix would be a wider range of voices on the bank's board and a move to use measures such as loan-to-value ratios as monetary policy tools, not just levers to maintain stability in the financial sector.

The last thing he needed was Green co-leader Russel Norman's radical call for an unusual form of quantitative easing that would print money to meet the Government's earthquake bills.

Perhaps the Greens' policy provides the extreme option that makes Mr Parker's plans that much more moderate and saleable; the role ACT occasionally plays for National.

More likely it gave National a stick to beat Labour with.

Mr Parker has not ruled out all forms of quantitative easing, but leaves the call on that to the bank governor.

Tellingly, Mr Parker and Mr Peters on Tuesday were deep in conversation at Mr Peters' favourite late-night Wellington haunt The Green Parrot; the day before Mr Peters' Reserve Bank of New Zealand (Amending Primary Function of Bank) Amendment Bill was due in the House.

The Greens may provide the ballast to get reform through the House, if there is a change of government after 2014.

But the fulcrum of a new policy is likely to fall between Mr Peters' bill and Mr Parker's plan, not in a radical move to rebuild Christchurch with newly-minted Kiwi dollars.

- The Dominion Post

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