Editorial: IMF report shows cool heads needed on economy

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Greens co-leader Russel Norman has accused the Reserve Bank governor Graeme Wheeler of complacency and being stuck in the 1980s. Photo / David White
Greens co-leader Russel Norman has accused the Reserve Bank governor Graeme Wheeler of complacency and being stuck in the 1980s. Photo / David White

It is always useful to get a global perspective on issues that are the subject of local political wrangling. Light is generally shed on areas that may be clouded by the heat generated by debate. In that context, the International Monetary Fund's annual report on the New Zealand economy is timely. It casts an especially valuable eye over the two questions of most current angst and anxiety, the significantly overvalued dollar and the overheated Auckland housing market. Its conclusions should put an end to much of the irrational comment on how these issues should be addressed.

The IMF says there should be no "messing with" the monetary policy framework just because the dollar is temporarily overvalued. Indeed, that framework, including a flexible exchange rate, was one of the reasons New Zealand had been relatively resilient in the face of the global downturn. "Do you want to mess [with] the framework because the exchange rate at the moment is overvalued, and do potentially long-term damage? I would be very reluctant to go down that path," said Bruce Aitken, the head of the IMF team.

That represents a strong riposte to politicians who have sought to reap advantage from manufacturers' grievances over the high dollar. It confirms the dangers inherent in, for example, the Greens' call for the exchange rate to be part of the Reserve Bank's mandate. The lower interest rates that flowed from this would, as the IMF notes, remove an advantage held by New Zealand's central bank. Unlike its counterparts in several nations, it still has the scope to cut interest rates if the country were hit by another major shock. Greens co-leader Russel Norman has accused the Reserve Bank governor Graeme Wheeler of complacency and being stuck in the 1980s. This report confirms that Dr Norman's credibility is under far greater threat.

On the overheated housing market, the IMF suggests a worst-case scenario involving external shocks could trigger a sudden decline in house prices. It is, therefore, appropriate to equip the Reserve Bank with macro-prudential tools to combat a build-up of systemic risk from rapid house-price inflation. At the moment, the central bank is considering a variety of new measures involving banks' capital and funding requirements and adjusting loan-to-value ratios.

Quite correctly, however, the IMF notes these tools come with substantial provisos. There has not been a lot of experience with them in advanced economies, and it says they should be used infrequently and with caution. "The fund's view is they should be deployed in a timely way, not very often and not for very long, and not seen as a substitute for the official cash rate," said Mr Aitken.

That, again, tallies with the approach of the Reserve Bank, not its critics. The governor has made it clear that the last thing he wants is an out-of-control housing bubble on top of the overvalued exchange rate and a drought. That is why he is moving quite quickly on these regulatory tools, which are designed to boost the resilience of the banking system while, only at the margin, slowing the housing market. But it is equally clear that they will need refining, and it will be hard to know when to use them most appropriately.

It is always tempting to seek miracle cures for vexing problems. That is why the tools being examined by the Reserve Bank have gathered an allure for some out of all proportion to their intended impact. And why some politicians press for lower interest rates, quantitative easing and extravagant intervention in the foreign exchange market. It is never as simple as that. The IMF report is a strong reminder of that.

- NZ Herald

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