In the comments to my last post on monetary policy, Charles Chauvel states that FCK hasn’t properly read the Inquiry into the future of Monetary Policy report, and that “nothing” Phil Goff said in his speech to Federated Farmers is incompatible with the inquiry. FCK begs to differ. Let’s look at what Goff says:

Labour wants to see a step change in our export performance.

Fair enough. There’s plenty of things we could do to make our businesses more competitive – for Government, that’s mainly about reducing the costs of doing business, things like business tax, compliance, ACC, etc.

We want policy that will keep our exchange rate as stable and competitive as possible.

Nothing wrong with wanting stable exchange rates. How exactly do you achieve them though? Even Brazilian central bankers don’t think they can keep their currency “stable”. New Zealand’s dollar was pegged until 1985, and suffered a number of speculative attacks prior in 1984, following the general election. The value of the dollar became a political issue – on the one hand a devaluation would mean a decrease in New Zealander’s quality of life (as the price of imports increase), but would help exporters (as their products would become more competitive). You cannot easily reconcile these two sectors.

Pumping billions of dollars into foreign reserves to keep the dollar at a “stable” rate is tantamount to pegging it. As we saw during the 80s, the Reserve Bank would have to either borrow billions to keep foreign reserves (not a particularly good strategy given our high level of foreign debt) or keep the Official Cash Rate (OCR) low, which of course leads to inflation. Then you’ve got the problem of making the rate “competitive”. A competitive rate is contradictory to a stable rate. Certainly, export businesses would benefit from certainty of a stable exchange rate. But the point here is that Goff is contradicting the inquiry’s report by putting it forward.

We want to reduce interest rates for businesses and home-owners, so that we put more money into the pockets of New Zealanders.

This statement contradicts itself. Sure, reducing interest rates will put more money into the pockets of New Zealanders. But ignoring inflationary pressures will mean the value of what’s in their pockets will decrease faster than before as prices rise. Again, you can’t have your cake and eat it too – this statement contradicts what the inquiry states.

Working New Zealanders with mortgages will benefit from policy that tilts the emphasis away from its current sole concern with the holders of wealth, to a focus on creating wealth.

Does it really? Working Kiwis with mortgages will certainly benefit, because inflation will increase the value of their houses far beyond what they borrowed to buy them – inflation fueled by lower interest rates. But will that actually tilt the emphasis towards “creating wealth”, especially in the export sector? Not a bit – in fact the opposite. Making property a more attractive investment proposition not only helps the Bob Jones of the world, it also means that most working Kiwis will go back to our old habit of putting everything we’ve got into acquiring a family home, and no new capital into exporting. Again, contradicting what the inquiry said.

Price stability and low inflation will still need to be important objectives for the Bank.

It’s hard to see how after Goff’s previous statements. Incidentally, this is the only statement that appears to not contradict the findings of the Inquiry into the Future of Monetary Policy report.