BRIAN FALLOW hears manufacturers argue that the Reserve Bank should be allowed more flexibility in its application of monetary policy.
Manufacturers are blaming the fallout from the Reserve Bank's battle with inflation for hobbling their growth in the last six years.
"Between 1995 and now, the manufacturing sector has been struggling to grow, and has felt that it is bearing the brunt of monetary policy," ManFed economist Peter Crawford said yesterday at a briefing on the federation's submission to the independent review of monetary policy.
Manufacturers' contribution to inflation has been small, 0.5 per cent a year, out of the 1 per cent average for the tradeables sector.
But inflation in the non-tradeable sector - those sectors of the economy that are not exposed to international competition, including Government charges - has averaged 3.3 per cent.
ManFed says that the disparity between tradeables and non-tradeables inflation argues for further Government action to inject more competitive discipline into the non-tradeables sector, such as reforming occupational licensing and reducing the number and impact of local authorities.
"Manufacturers are very comfortable with low inflation and are strong advocates of keeping the 0 to 3 per cent target. But we began to see a lot of problems, not with monetary policy but with the Government washing its hands of responsibility for inflation and saying to the Reserve Bank, 'That's your responsibility'," Mr Crawford said.
One of the questions the independent review has been set concerns the coordination of monetary policy with other areas of economic policy.
ManFed is also critical of the Reserve Bank's output gap model, central to its economic modelling and forecasting processes.
The output gap model assumes that inflation will increase if demand in the economy exceeds the ability of the economy to supply that demand.
ManFed questions the quality of the data on which estimates of the output gap are based.
And it argues that the opening-up of the economy to international competition since 1985 now means that excess demand for tradeable goods is more likely to be met by a surge in imports than by higher prices.
Mr Crawford said the bank was too inclined to focus on aggregate numbers and not on the detail beneath them.
For example, it had expressed concern in May at a rise in price-raising intentions in the March quarterly survey of business opinion. Mr Crawford said further analysis of the survey responses showed that most of the increase was among exporters, not a problem for the Reserve Bank.
ManFed argues that the measure of inflation used for monetary policy purposes should be the gross national expenditure deflator, a broader and generally lower measure than the consumer price index.
And it says consideration should be given to adopting the Australian practice of targeting an average level of inflation over the course of a business cycle.
But it welcomes what it sees as a greater degree of candour, especially in the most recent monetary policy statement, about the uncertainties clouding the economic outlook. In the past the bank's judgments had seemed more hard and fast than they really were.
Deutsche Bank, in its submission to the review, argues that the Reserve Bank should aim for inflation of 2 or 2.5 per cent, instead of aiming for the 1.5 per cent mid-point of its present target range.
While there was a lot of evidence of the harmful effects of high inflation, international research failed to provide conclusive evidence that it was beneficial to deflate further from already low levels of inflation, Deutsche Bank chief economist Ulf Schoefisch said.
Accountability remained an issue, he said. While the governor, Dr Don Brash, was held accountable if inflation moved outside the target range, he did not have to explain himself over the response to the Asian crisis, "where the bank underestimated the adverse consequences for the domestic economy and required interest rates to rise in response to a weakening exchange rate, thereby exacerbating the downturn in early 1998."
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