A reader has kindly reminded FCK of Parliament’s Inquiry into the future monetary policy framework, reported just over a year ago, when Labour had a majority on the Finance and Expenditure Select Committee. The report, written at the direction of former Minister of Finance Dr Cullen, was intended to re-enforce Labour’s commitment to bipartisan support for price stability and inflation targeting. Goff’s speech yesterday repudiated that commitment.
The key findings of the committee were (emphasis by FCK):
- confirms the importance of maintaining price stability as a vital component of a healthy and well performing economy.
- agrees that monetary policy remains the primary means for maintaining price stability.
- acknowledges that the Policy Targets Agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand recognises the important role price stability plays in supporting the achievement of wider economic and social objectives, and that it requires the Reserve Bank, in pursuing its price stability objective, to operate monetary policy in a manner that avoids unnecessary instability in output, interest rates, and the exchange rate.
- acknowledges that New Zealand’s monetary policy approach, emphasising central bank independence and inflation targeting, is standard among, small, open, and developed economies.
- acknowledges that New Zealand’s monetary policy operates in a similar manner to countries with wider mandates, such as Australia and the United States.
- acknowledges that at times of strong inflation pressures, the costs of maintaining price stability are often borne disproportionately by the export sector.
- acknowledges that a range of economic factors and resource constraints have contributed to recent inflation pressures and to how quickly monetary policy has affected inflation outcomes.
- acknowledges that factors other than monetary policy—such as sustained improvement in trend productivity—play a key role in lessening the adjustments required to maintaining low inflation over the medium term.
- believes that constraints on the availability of natural resources, particularly crude oil, are likely to be increasingly significant contributors to inflation.
- heard extensive evidence concerning supplementary stabilisation instruments, such as a mortgage interest rate levy, an interest-linked savings scheme, and other taxes that might complement interest rates in managing inflation, but did not find the arguments
in their favour compelling enough to support them being pursued further at this time.
What’s fascinating is that Labour are now essentially repudiating their own inquiry, or at least arguing that price stability has a much great affect on the export sector and that it is incompatible with “wider economic and social objectives”. The question is, why? Charles Chauvel should have enough of a background in business (being a former board member of Minter Ellison Rudd Watts and Meridian Energy) to know that price stability is important to all sectors of the economy.
Update: The inquiry was not directly by Michael Cullen. Mea culpa.
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"Why is Labour going against its own inquiry?"
Why did National drop opposition to Interest Free Student Loans, Kiwibank and the Goldcard?
Well because they are under new management and they want to win the next election. I think the real question is whether this is a strategy that will work.
You need to read the report and Phil Goff's speech last week more carefully.
The findings that you cite from the Inquiry into Monetary Policy last year, that I chaired, weren't produced "at the direction of" Michael Cullen. Nor are they inconsistent with what Phil Goff has said.
Labour remains committed to price stability. Social democratic parties in the 1970s learned some hard and valuable lessons when we saw the value of the savings of the people we represent eroded by runaway inflation, and we won't be reverting to the policy settings that allow that to happen.
A key finding of the inquiry, that you cite above, is "at times of strong inflation pressures, the costs of maintaining price stability are often borne disproportionately by the export sector". An unintended consequence of the way we operate monetary policy is the attractiveness of the kiwi to international currency trading. Its resulting rapid and unpredictable movements mean that many exporters are simply unable to compete, leading to them shed jobs onshore.
My business background shows me that it is not in our national interests to bleed jobs from our productive sector through the unintended consequences of the operation of monetary policy on the exchange rate. Keeping the goal of price stability, but adding another one like preserving full employment (which is the situation in Australia and the USA – hardly exemplars of runaway inflation) would do no harm, and could do much good.
Those are both fiscal policies, I'm talking about monetary policy here. That has a much great affect on New Zealand's long-term welfare than free public transport for old folks or increasing the cost of university education to the taxpayer…
Mea culpa on Michael Cullen Charles.
I'll respond to your substantive points in another post.
[...] the comments to my last post on monetary policy, Charles Chauvel states that FCK hasn’t properly read the Inquiry into the [...]