Mood of the Boardroom: Inflation no longer the defining measure

Reserve Bank Governor Graeme Wheeler.
Reserve Bank Governor Graeme Wheeler.

Nearly 50 per cent of CEO respondents believe the Government should rewrite its agreement with the Reserve Bank to give the Governor the ability to consider wider economic factors beyond inflation.

This is a marked change from previous surveys where there was a consensus that inflation should be the prime focus for the central bank.

A leading banker said the current Reserve Bank Act was right for the 1980s and 1990s, when inflation was the problem -- in a post-global financial crisis, low-inflation world, the Governor needed to focus on different things.

"Inflation only leads to ill-matched decisions," said a SME chief. An agribusiness boss said "it should not just be inflation -- economic growth needs to be included".

Don Brash, chairman of ICBC (NZ), said there remained a high degree of consensus that over the longer term monetary policy can't significantly effect an improvement in real economic growth or employment.

"And the Government should probably either reduce or widen the inflation target band. It's not obvious to me that an average movement in the price of goods and services (as measured by the CPI) of say 0.5 per cent a year should be regarded as a serious problem to be solved.

"There's not much evidence of people holding off spending because the CPI is at current levels," said Brash, who is a former Reserve Bank governor.

Several felt giving the Governor the ability to look at broader economic factors would place too much power in a single person. But an investment banker said there could also be a Board of Governors or similar "so that monetary policy is not the sole domain of one individual".

There was "a rumble" recently between the Government and the Reserve Bank over monetary policy. John Key urged the bank to target property investors with tougher lending rules, saying it should "just get on with it".

Reserve Bank Deputy Governor Grant Spencer said the bank was considering new loan-to-value ratio (LVR) restrictions, but would not introduce them before the end of the year. He also suggested the Government might consider taking another look at its immigration and tax settings.

Several chief executives suggested there should at least be open debate over how best fiscal stimulus should be delivered -- infrastructure, social spending, tax cuts or science and research and development.

At present, lack of inflation is killing wage growth; businesses are making gains on costs but sales margins are falling, and low interest rates have pushed stored wealth into property and shares.

On the question of whether the Government should use its fiscal levers to take pressure off monetary policy, an investment banker said, "I am inclined to keep protecting the balance sheet -- use it counter-cyclically when New Zealand is not going so well. Remember, we are outpointing most countries at the moment." Beca's Greg Lowe cautioned levers need to be applied carefully and gently: "Too much cooling can slow the economy, slow growth and reduce jobs."

Forty-one per cent of CEOs were against using fiscal policy in this fashion. But 25 per cent of respondents were in favour, with EMA boss Kim Campbell saying "with such low interest rates and these expected to remain, it's an opportunity of a generation to invest in infrastructure".

Thirty-four per cent were unsure.

- NZ Herald

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