Jul 8, 2008

Leave The Reserve Bank Act Alone

We agree fully with today's NZ Herald Editorial today. Leave the Reserve Bank Act alone.

The analysis of why Mallard suggested change is interesting

Desperate politicians say desperate things. In Parliament last Wednesday, an Associate Finance Minister, Trevor Mallard, said the Reserve Bank Act, 20 years old next year, had not worked as well in its second decade as it had in its first, and that the Government was open to alterations.
This is the sort of talk that can shake the foundations of economic stability. The act has been the means by which inflation was brought under control and kept under control with largely bipartisan support. Why would a senior Labour minister disturb it now?
Possibly Mr Mallard is expressing a maverick view, but that seems unlikely. If Michael Cullen should decide to retire at this year's election, Mr Mallard is his probable replacement. Conceivably he could be Finance Minister when Labour bids for a fourth term.

With the polls running heavily against that prospect, Labour's re-election hopes rest on small parties that might hold the balance of power.
Winston Peters' party might be the most pivotal of them. He has railed against the Reserve Bank Act from its inception and still believes it is doing more harm than good. Mr Peters has promised that after the election he will "talk first" to the party that has won the most votes, but that is as far as he goes.

Mr Mallard believes the Reserve Bank Act has not worked as well in its second decade because counter-inflationary interest and exchange rates attracted investment in housing that fed a consumption boom and reduced export returns. Now, he says, inflation is being driven by imported fuel and food prices that monetary instruments cannot counter.
He has no particular amendments to the Reserve Bank Act to suggest. When pressed, he said: "I'm not proposing any change at all and I want to make it absolutely clear no decisions or current proposals are before the Government." There was no cross-party consensus for change, he said, and added: "The question is whether there is enough minor party support for something we would want to do."
So it seems to be just a speculative pitch to Mr Peters.