Monetary policy works, so why isn't it?

Opposition leader, the Hon Phil Goff MP, has told Federated Farmers National Council in Wellington today that the Reserve Bank Act and monetary policy targets and tools are struggling to rein in the Kiwi dollar and deliver appropriate interest rates.

“Mr Goff didn’t acknowledge it but the current level of Government spending is one issue that lies at the root of the problem with monetary policy,” says Don Nicolson, Federated Farmers President.

“In real terms, Government is consuming some $29 billion more today than it was back in 2000.

“With the current stimulus package of $12 billion, the Government is sucking in $413 a second, or $250 million a week. Fiscal policy is trumping monetary policy.

“I would say that any break in the consensus on monetary policy should not be undertaken until the affect of Government is fully understood.

“We absolutely agree with Mr Goff and commend both he and the Hon David Cunliffe for highlighting that the exchange rate is undermining the competitiveness of our key exports.

“While Mr Goff felt there was “no silver bullet” solution to the exchange rate, the Federation believes the rampant growth in Government spending and debt is retarding economic recovery. It is certainly preventing the necessary rebalancing of the economy from the non-tradable sector to the tradable sector.

“What exporters need right now are concrete solutions that will actually make a difference to exchange rate volatility and interest rate levels.

“If you include local authority spending, total Government expenditure is on track to hit 50 percent of Gross Domestic Product by 2013. The private sector is being trampled by this growth, which is draining the life out of the export sector.

“The Federation pushed financial institutions hard to pass on gains from the reduced Official Cash Rate, submitted to the Parliamentary inquiry into banks and communicated with the Reserve Bank on various issues that affect farmers.

“I agree with Mr Goff that the monetary policy is certainly not perfect and we hope his announcement will produce some real solutions. Where we differ, however, is that I believe some of the blame must be attributed to the increasing size of Government.

“We look forward with interest to what the Labour Party is proposing should be done to actually make a difference,” Mr Nicolson concluded.