Monetary Policy – More Focus on Employment Need

“The slow fall in unemployment anticipated by the Reserve Bank reinforces the need for wider objectives of monetary policy,” says Bill Rosenberg, CTU Economist.

“It’s forecasts still have the unemployment rate at 6.0 percent at the end of the year and above 5.0 percent out to 2016. These are well above levels we know we can achieve and they are levels we should not be happy with. The Bank commented on the state of the labour market keeping down wage rises. We would not like to think that unemployment is being accepted as an anti-inflationary tool, and one that depresses the real living standards of New Zealand wage and salary earners.”

Bill Rosenberg says “the Bank’s forecasts also see annual GDP growth peaking at 3.5 percent in June next year and then sliding back to growth rates of 2.0 percent by the end of the following year. While it was interesting to hear the Governor saying that the exchange rate was one of the factors he would take into account in deciding on future interest rate rises, he also made clear it was too high and was burning off exporters and firms competing with imports. For a better performing economy in the longer run, a clearer focus on the exchange rate is needed.”

“All of these factors point to a need to rethink the objectives of monetary policy and the tools that are used to achieve those objectives. The Productivity Commission, in its recent discussion paper on Regulatory Institutions and Practices suggested that complex decision making was more suited to a board than an individual. A broadly based Reserve Bank board with decision making power may be another important ingredient in reforming policy making in this area.”
 

—