Opinions of report differ

It was a case of economists at 20 paces yesterday when Infometrics senior economist Matt Nolan took issue with a Berl report prepared for New Zealand First leader Winston Peters.

In its report, Business and Economic Research Ltd economists Kel Sanderson and Ganesh Nana recommending amending the Reserve Bank Act to "benefit New Zealanders' lives".

The present Act's primary function of controlling rising inflation was critical when it was enacted in 1989. The world had since successfully beaten inflation and the current Act was redundant, the two Berl economists said.

"Small open economies like New Zealand who have Reserve Banks that cause high interest rates attract hot money - as we experienced with the 'carry trade' - which unbalances the finance sector and causes its eventual collapse."

An amended Act must ensure the Reserve Bank monitored the money and credit supply to make sure another "boom" by hot money and loose credit did not start, the economists said.

The issues has become a political issue because Reserve Bank governor Alan Bollard issued his last Monetary Policy Statement yesterday, as he leaves to be replaced by Graeme Wheeler.

Finance Minister Bill English and Mr Wheeler will sign a new policy targets agreement in about two weeks and there have been calls for the new agreement to include new measures to control the value of the currency and supply of money.

Mr Nolan said the Berl-NZ First report suggested the importance of inflation targeting was gone.

"But this conclusion is simply wrong and rests on a misunderstanding of what has been going on with the New Zealand economy in recent years.

"The report confuses the facts about the New Zealand economy and comes up with a fallacious recommendation to scrap inflation targeting to target a range of other factors."

The purpose of inflation targeting was to help wage- and price-setters set expectations of what would happen to the price of goods and services over time, he said.

The Reserve Bank controlled inflation by announcing its target and adjusting the OCR in a way that was consistent with changes in saving and investment with the economy.

"Interest rates have had to be higher in New Zealand due to the economic fundamentals that have driven up debt.

Blaming the Reserve Bank involves getting the explanation the wrong way around," Mr Nolan said.

Some of the fundamentals behind New Zealand's relatively high interest rates included a lack of competition in the domestic economy due to the country's small size, , the large size of the government relative to GDP, tax policy and the nature of housing and residential building industries.

Making the Reserve Bank less transparent while ignoring the real economic issues that plagued New Zealand would not make everyone better off.

"It will ultimately make most New Zealanders significantly worse off," Mr Nolan said.



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