KEY POINTS:
New Zealand's monetary policy system, seen as visionary when it was created, is in need of a major overhaul, according to a submission by the NZX.
The operator of the stock exchange says current monetary policy is almost certain to fail because the world has changed dramatically since the Reserve Bank Act was passed.
It is time for change, it said.
High interest rates are stopping investment and putting New Zealand firms in a position of permanent disadvantage because their cost of capital is higher than their competitors, it said.
The NZX is recommending to Parliament's Finance and Expenditure Committee that New Zealand adopt a US Federal Reserve-style approach to monetary policy that takes into account both long run price stability and economic output.
It wants regulation of finance companies, a longer time period between reviews of the official cash rate, a Minister for Capital Markets and a continuous disclosure regime for anyone raising money from more than 250 people.
NZX says the US Fed is set the goal of maximum employment, stable prices, and moderate long-term interest rates. It does not have a specific Consumer Price Index (CPI) target like the Reserve Bank of New Zealand (RBNZ).
The singular focus on the CPI by the RBNZ was believed to be a major strength, but it has had an unintended consequence of providing an insurance policy for speculators in markets.
NZX chief executive Mark Weldon said a hedge fund manager once told the RBNZ governor in his presence "you are the original inflation buster, I will always back you to raise interest rates, and that is why I am buying the Kiwi, and will continue to do so".
The NZX says the RBNZ is ignoring he equity market because of its narrow focus on the CPI.
But the big area of concern raised in the submission is the finance company sector, which is "another damaging blind spot" for the central bank.
The cost of borrowing by finance companies is not related to the official cash rate, the RBNZ's main policy instrument, NZX said.
"The lack of willingness to regulate or supervise these companies has been resounding. Yet they provide billions of dollars each year to the property market."
Four finance companies have collapsed, including Bridgecorp. None of them were governed by the continuous disclosure rules of the NZX because they were not listed.
Also because finance companies are not banks, they have not been regulated by the RBNZ.
Finance companies have lower operating costs than banks and have been borrowing below the official cash rate, which is a "mispricing of the worst kind", according to NZX.
"The finance company sector needs an immediate and strict regulatory overlay, from top to bottom, in order to reduce the mispricing of risk," NZX said.
The NZX's advocacy for bold change comes at a time when Prime Minister Helen Clark has said that bold changes to the monetary policy framework are unlikely in the current MMP parliament.
- NZPA
