25 Sep 2012

Policy Targets Agreement receives mixed response

8:44 am on 25 September 2012

The new Policy Targets Agreement between the Government and the Reserve Bank has had a mixed response, with some hailing it as prudent, while others have dismissed it as single-minded.

Under the agreement, the inflation target band of 1 - 3% remains, however the Reserve Bank is now required to focus on keeping it near the mid-point of 2%.

A requirement to monitor asset prices could prompt the central bank to intervene if there was moderate a housing boom.

The agreement is very similar to the previous one, which doesn't surprise BERL chief economist Ganesh Nana.

But Dr Nana says he's disappointed that an opportunity to create a better monetary policy tool has been missed.

He says there is a continuing focus on inflation, but this generation's problem will be jobs and exports and it's time to shift the focus to those areas.

Westpac chief economist Dominick Stephens backs the new agreement and welcomes the additions to keep prices in check.

He says the requirement to monitor asset prices shows lessons have been learnt from the last housing boom, which proved to be detrimental to the economy.

Mr Stephens says the focus on the mid-point of the target band is positive and provides a clearer focus on what the Reserve Bank is trying to achieve with inflation.

Council of Trade Unions economist Bill Rosenberg says more should have been done to address the high New Zealand dollar, but agrees the monitoring of asset prices is useful.

And he says the central bank could make use of loan to value ratios to moderate housing-fuelled inflation.

Mr Rosenberg says banks could be prevented from lending more than 80% of the value of the house when giving a mortgage to a family, for example, and there could be other ratios for other lending such as for farms.

This acts directly on asset prices and housing prices, rather than using interest rates to try and push down house prices.

The problem with using interest rates is that it pushes up the dollar and makes it very difficult for businesses to invest, he says.

Employers and Manufacturers Association chief executive Kim Campbell says the agreement is sensible and indicates the Reserve Bank may be able to apply other levers to manage inflation.

While Mr Campbell acknowledges the high currency is a problem for some, he believes firms should counter this by adjusting their business model to remain competitive.

He says the economy's silver lining - the rebuilding of earthquake ravaged Christchurch - will put further upward pressure on the New Zealand dollar.

The new Policy Targets Agreement takes effect on 26 September, when Graeme Wheeler starts his five-year term as Governor.