Goff to end accord on monetary policy

BY TRACY WATKINS
Last updated 05:00 19/11/2009

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Labour leader Phil Goff is calling an end to the 20-year consensus on monetary policy.

Mr Goff is expected to use a hard-hitting speech to Federated Farmers in Wellington today to declare that the Reserve Bank's policy targets – which influence interest rates and the dollar – are no longer working.

His speech is expected to call for a lift in New Zealand's export performance and hit out at New Zealand's volatile exchange rate as the major stumbling block.

The Reserve Bank uses interest rates to curb consumer demand when inflation threatens to breach the 0-3 per cent target agreed to with the Government under a policy targets agreement.

There has been rare accord between National and Labour on the Reserve Bank's inflation-busting role for two decades.

But there has been mounting criticism that the Reserve Bank Act is too narrowly focused and hurting both exporters and householders after years of record high interest rates to keep inflation under control.

A select committee inquiry into monetary policy two years ago heard criticism from groups, including leading economists, that the focus on inflation had caused a vicious cycle of "unintended and undesirable consequences".

The focus on inflation meant that interest rates were raised to higher levels than most countries when the Reserve Bank forecast inflation to be above its target band.

That had attracted foreign funds into New Zealand, enabling a rise in house prices and causing big fluctuations in the financial sector.

But the dollar has remained at punishingly high levels in the wake of the global financial crisis, despite the Reserve Bank's official cash rate – which influences the interest rates charged by banks – plummeting to new lows.

Labour came under pressure while in office to change monetary policy and signalled a rethink toward the end of its term but did not indicate what might replace the current regime. Mr Goff is not expected to spell out the alternatives in his speech today but will call for more work on the options.

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