By BRIAN FALLOW
WELLINGTON - The best chance of avoiding a repetition of the big rise in the exchange rate which occurred in the mid-1990s is to move promptly to curb inflationary pressures, says Reserve Bank governor Don Brash.
Dr Brash's newly amended agreement with the Government requires him to try to avoid unnecessary instability in output, interest rates and the exchange rate in the course of pursuing the goal of price stability.
He told a Melbourne business audience yesterday that discharging that new mandate made it particularly important to adjust monetary policy in a timely way, as he had last month.
He got a positive response from the audience that included senior bankers. After the speech, several bankers said privately that they had no major concerns about the conduct of New Zealand monetary policy.
Dr Brash told the meeting that the appreciation of New Zealand's real exchange rate in the mid-1990s had not been out of line with appreciations experienced during the 1990s by the United States and Britain, and was much smaller than the appreciation of the Japanese yen.
"Their experience makes me reluctant to promise we in New Zealand will be able to avoid big exchange rate appreciations in the future," he said. "But we certainly intend to try. We recognise that big appreciations of the kind we experienced from early 1993 to early 1997 make life difficult for the export and import-competing sectors.
"It is our current assessment that the best way of reducing the risk of a repetition of that kind of experience is to ensure that monetary policy avoids a situation where inflationary pressures build up to a big head of steam, with the consequence that policy has to be tightened aggressively for a prolonged period."
Dr Brash said the differences between the New Zealand and Australian approaches to monetary policy were more apparent than real.
Australia's inflation target of 2 to 3 per cent on average over the cycle, while expressed differently, was similar to the approach now adopted in New Zealand with a 0 to 3 per cent per annum target but not too much concern over temporary breaches of the bottom or top of this range.
Dr Brash said reducing inflation from 15 per cent in the mid-1980s to below 2 per cent in 1991 had been at a cost in growth and employment.
But in the following six years, New Zealand's GDP growth averaged 3.5 per cent a year, compared with Australia's 4 per cent.
Since then growth in the two economies had diverged with Australia motoring on strongly while New Zealand went into recession in the first half of 1998.
"In my view the main reason for the difference in performance between the two economies in 1998 was that Australia was at quite a different stage in its business cycle than New Zealand when the Asian crisis struck, perhaps because we in New Zealand were a bit slow to tighten monetary policy in 1993-94."
Brash pushes war on inflation
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