Staying the course

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell.

Reserve Bank Governor Alan Bollard has taken on his critics in some style today.

Opposition leader Phil Goff tried to open up a debate about monetary policy late last year, suggesting the laser-like focus on inflation and the single tool of the Official Cash Rate should be consigned to history.

Dr Bollard has defended his performance and the overall regime for monetary policy in a speech today. He dismissed the ideas for an Anzac currency union or a Singaporean style set of currency controls, but he did welcome reforms to property taxation. Mr Goff should accept the orthodoxy on monetary policy and agree to the taxation reforms suggested by the Tax Working Group.

I agree with the Governor's comments. I'm no huge fan of an Anzac currency union or Singaporean style currency and capital controls. The more I see of Europe and Asia, the more I think a freely floating currency is a great automatic stabiliser. Greece, Spain and Ireland would kill for our currency regime right now. We also don't have the savings, the trade-flows or the currency reserves to support a Singaporean style system.

I'm no huge fan of Singapore. I lived there for over a year. It's a one family autocracy that runs a workforce that is too scared of the first family (Lee Kuan Yew and his offspring) to be truly creative. You can run a currency regime in a culture like that. I don't think it would work here.

I also agree with Bollard that tax reform for the property sector is necessary to rebalance the economy. Hopefully the Tax Working Group's proposals, which are politically and fiscally neutral enough to go through, are adopted in the May budget.

He's right too about the government needing to withdraw stimulus, although I don't think that should be used as an excuse for not raising the Official Cash Rate from its record low of 2.5 per cent sooner rather than later.

I sort of wish he didn't bother commenting on it, as much because it makes clear the separation. I won't comment on yours if you don't comment on mine. Mucking around on both sides of the fence muddies the waters.

I also like the Governor's comments on other tools. The Reserve Bank's prudential liquidity policy is a sensible (and trend-setting) move to dampen the prospect of another credit boom in housing. It is a handy supplementary tool, but is no replacement for moving interest rates to control the economy.

It essentially forces the banks to raise more money for longer terms and more money domestically to avoid being stung by a freeze on international markets. The upside is that it increases the banks' funding costs, forcing them into a defacto tightening of monetary policy, but also allowing them to avoid an explosion in rates if markets were to implode again (which is still a real possibility I reckon).

The one area where I differ with the Governor is on capital controls for banks. He's right that it would be difficult to use as a monetary policy-style lever, but I still think the capital requirements for housing and farming lending are too low. They may yet rise courtesy of the changes being driven through by the Basle Committee. That would be a good thing.

Meanwhile, Mr Goff should focus more on what he can do in a bi-partisan way on tax reform for property and less on a quixotic campaign to turn back the clock on monetary policy.

Bernard Hickey