Encouraging exporters is the key to turning around the economy, writes David Cunliffe, Labour's spokesman on Finance.
Labour's new approach to monetary policy has generated a lot of interest, most recently at the Herald's Mood of the Boardroom discussion. It is timely to set out what we are proposing and why.
Our aim is to create a modern monetary policy environment that will support exporters better.
Leader Phil Goff has a bill ready to support broader objectives for the Reserve Bank.
High interest rates have put export businesses at a disadvantage against overseas competitors, who borrow more cheaply.
The heavy trade in our currency comes at the price of a highly volatile Kiwi dollar, making the business environment riskier for exporters.
Labour will retain key features of present monetary policy but make significant changes.
The independence of the Reserve Bank is essential. So is its focus on inflation.
But Labour will require the bank to pursue broader objectives, while retaining our full commitment to price stability and the existing 1 per cent to 3 per cent inflation target.
New Zealand is unusual in having a single policy goal for the Reserve Bank. Australia, in contrast, is also required to aim for a stable currency, full employment, and the economic prosperity and welfare of Australians. The bill will introduce the same outcomes for our Reserve Bank.
Labour also wants to give the bank a broader set of tools and is looking at greater use by the Reserve Bank of prudential supervision tools to regulate banks' capital adequacy and risk.
For example, the bank's new core assets ratio, which requires banks to hold minimum levels of assets in different classes such as domestic deposits and low risk securities, can help encourage domestic savings, manage risk and enhance system stability.
By adjusting this ratio the bank can also tighten or loosen monetary conditions in a counter-cyclical manner. Other central banks are exploring similar tools as part of learning the lessons of the global financial crisis.
Labour believes this new role should be explicitly provided for as part of a review of the Reserve Bank Act and the Policy Targets Agreement that operates under it.
Other complementary monetary policy tools may help the bank manage financial conditions without all the pressure being borne by the Official Cash Rate. They can better respond to asset bubbles such as those that helped create the global financial crisis.
Unduly high interest rates designed to cool the property market in Auckland can cripple high-tech exports in Christchurch. That is a bad outcome for exporters and for New Zealand.
The differential between higher interest rates in New Zealand and those overseas had the perverse effect of driving increased liquidity into the economy, which fed consumption pressures and price bubbles higher interest rates were meant to curb.
That was a factor in banks being keen to lend to New Zealand households for mortgages during the last property cycle. However, it reduced housing affordability, diverted funds from more productive business investments, and left the country deeper in foreign debt.
Labour has ruled out adopting a mortgage interest levy or variable-rate GST. However, during a previous monetary policy review the Reserve Bank recommended consideration of a small tax on inbound investment flows, which are often tax-free in practice. Labour agrees it would be timely to consider this concept.
New Zealand must earn its way in the world by exporting more. Labour wants to rebalance the economy by improving the competitiveness of our export sector, both internally relative to other sectors and internationally relative to our competitors.
Labour believes there should be a stronger role for a well-regulated domestic banking and finance sector. We appreciate the constructive role that over time large Australian banks have played in New Zealand, and the importance of maintaining a strong banking sector during times of international turbulence.
However, we are aware that being able to generate more savings onshore, and having a stronger domestic banking industry, helps keep more value in New Zealand and reduces the impact of outbound banking profits on our seriously negative current account.
Labour is considering a range of policies that will contribute to encouraging savings, including new safe savings products for mum and dad investors, restoring and enhancing Kiwisaver, and restarting contributions to the New Zealand Superannuation Fund.
Like most New Zealanders, we are determined Kiwibank should stay in Kiwi community hands and not be sold off to the highest bidder - in whole or in part.
We support in principle the proposal to further capitalise Kiwibank's balance sheet in order to expand its level and range of onshore lending. We are aware of the need to enhance domestic financing options for New Zealand businesses.
Rebalancing the economy is a priority. Doing so requires a clear focus on turning around the drivers of present imbalances - inadequate savings, exports and innovation, not just by cutting public services or selling more strategic assets.
Proper monetary policy reform is an essential part of this broader rebalancing effort. Labour is in favour of responsible and progressive reform, in line with leading international bodies like the Basel Committee and the group of 20 industrial economies.
Monetary policy must contribute to rebalancing our economy by encouraging exports and the real economy in the interest of all New Zealanders.