14 Sep 2012

Bank's control over economy limited - Bollard

10:30 am on 14 September 2012

Departing Reserve Bank Governor Alan Bollard says some of those who argue he should have tried harder to control the exchange rate appear to think he has more control over the economy than is the case.

Analysts have said Dr Bollard has done what is required in the law covering the bank and kept inflation in check, but question the merits of of targetting inflation alone.

Dr Bollard, who is to take up the top role with APEC, says the Reserve Bank has had to operate within the law and ensure stability so that people can make the right savings decisions to allow the economy to grow.

"There's a range of criticisms, and some of them might turn out to be valid over time, but they generally reflect the fact that I think a lot of New Zealanders might like to think that someone has much more control over an economy, and indeed the international parts of that, than we actually do."

Dr Bollard says 23 countries have followed New Zealand in using flexible inflation targeting to control prices and maintain financial stability, and none have deviated from that path.

Economic research firm Berl's chief economist Ganesh Nana says Dr Bollard has done a good job of curbing inflation, which is the main focus of the Reserve Bank Act.

But he says at the same time, unemployment, foreign debt and the exchange rate have been allowed to run out of control.

Dr Nana says it's unfortunate the Government is sticking with its policy of targeting inflation, while other countries are using exchange rate management, taxes on foreign exchange transations, compulsory superannuation and stricter controls on credit.

Financial commentator Bernard Hickey says international research is increasingly questioning the merits of inflation targeting, while letting the currency, debt levels and other economic factors go unchecked.

He says while New Zealand weathered the global financial crisis better than many other countries, that was due to the country's strong links to Australia and China, which were largely unscathed - not economic policy.

Dr Bollard is leaving after 10 years heading the Reserve Bank to become executive director of the APEC Secretariat in Singapore for a fixed term of three years. He starts on 1 January next year.