ECONOMICS : Going Soft on Inflation?

Article excerpt

Byline: Bob Edlin

Commentators who were dismayed early in June by the Reserve Bank's signalling an easing of interest rates have cause to become greatly more perturbed. Their initial cause for disquiet was a suspicion that RBNZ governor Alan Bollard was going "soft" on inflation. Worse, early in July the Government seemed to be going soft on the Reserve Bank Act and its singular focus on inflation.

Associate Finance Minister Trevor Mallard raised doubts about Labour's commitment to the Act's monetary policy framework on 2 July. NZ First leader Winston Peters questioned him in Parliament that day about a Reserve Bank initiative to pursue "options for alternative instruments" for monetary policy. Would those alternatives take into account the balance of payments, exports, GDP growth, and full employment "as equally important elements as controlling inflationo?

Mallard replied it was too early to anticipate what would be included. It had been appropriate for the newly independent Reserve Bank to have been given a single inflation-focused objective when the Act was passed -- but "the economy has changed a lot in the last 20 years: the major sources of inflation are different, and we have a much more open economy."

For several years, under both governors, inflation had been driven by increased domestic demand stemming from a buoyant housing market, fuelled by cheap foreign capital attracted by a stable economy and relatively high interest rates. Inflation challenges now were being driven by record-high international prices of food and oil.

In both cases the tools available to the Reserve Bank had not been able to address those problems. The Government was open to looking at alternatives that best serve "the modern New Zealand economy".

Labour MP Moana Mackey then asked if the Government was open to proposals to improve the operation of monetary policy. The short answer was 'yes'. That's why the Government commissioned the "Supplementary Stabilisation Instruments" report from Treasury and the Reserve Bank and why the Finance and Expenditure Committee was invited to conduct an inquiry into monetary policy involving all political parties. But (here comes an electioneering niggle) "at every step the National Party, and especially Bill English, have done all they can to derail and disrupt attempts to obtain political consensus around this very important economic issue".

Peters then asked a politically charged question in three parts:

1. Could Mallard confirm that the Reserve Bank Act "simply does not work for this economyo? …