Federal Reserve action requires exchange rate action

The Federal Reserve’s decision to continue quantitative easing will push our dollar even higher and demands action from New Zealand, says Labour’s Finance spokesperson David Parker.

“Quantitative easing is the new reality and there’s no telling how long it will last. We face competitive devaluation and ignore it at our peril.

“As a consequence exporting businesses and import substituters are shedding jobs and shutting down. Our economy is struggling under the weight of an inflated dollar.

“It is the responsibility of the Government to take action and help exporters and a key is broadening the objectives of the Reserve Bank.

“Around the world more and more economists are criticising the primacy given to inflation targeting over other aspects of the economy such as the exchange rate.

“Just last month Alan Bollard said: ‘In a globalised world, big players lowering their domestic interest rates, whether by QE or any other tool, will (all else equal) tend to promote capital flows to other countries and appreciation of their exchange rates. As a small open economy, New Zealand has often seen the effects of carry trades on the exchange rate. This can be distortionary and problematic, because an economy relies on its exchange rate as a signalling price.’

“National are backward-looking on this issue and refuse to consider solutions. On The Nation today Steven Joyce called any attempts to focus on the exchange rate a snake-oil solution, just as he previously dubbed critics voodoo economists. He simply substitutes insults for analysis.

“Increasing numbers of reputable economists have the contrary view, and even the outgoing Reserve Bank Governor has been forced to concede ‘it is a moot point’.

“The announcement that quantitative easing is continuing means that as a consequence our currency is inflated and our exporters and those losing their jobs are bearing the brunt.

“The objectives of the Reserve Bank need to be broadened.”