IMF on monetary policy

The Herald editorial:

It is always useful to get a global perspective on issues that are the subject of local political wrangling. Light is generally shed on areas that may be clouded by the heat generated by debate. In that context, the International Monetary Fund’s annual report on the New Zealand economy is timely. It casts an especially valuable eye over the two questions of most current angst and anxiety, the significantly overvalued dollar and the overheated Auckland housing market. Its conclusions should put an end to much of the irrational comment on how these issues should be addressed.

The says there should be no “messing with” the framework just because the dollar is temporarily overvalued. Indeed, that framework, including a flexible exchange rate, was one of the reasons New Zealand had been relatively resilient in the face of the global downturn. “Do you want to mess [with] the framework because the exchange rate at the moment is overvalued, and do potentially long-term damage? I would be very reluctant to go down that path,” said Bruce Aitken, the head of the IMF team.

We are a minnow. To think we can unilaterally change our exchange rate is silly. You can do it by printing more money of course, which is a great way of making the entire country poorer.

That represents a strong riposte to politicians who have sought to reap advantage from manufacturers’ grievances over the high dollar. It confirms the dangers inherent in, for example, the ’ call for the exchange rate to be part of the Reserve Bank’s mandate. The lower interest rates that flowed from this would, as the IMF notes, remove an advantage held by New Zealand’s central bank. Unlike its counterparts in several nations, it still has the scope to cut interest rates if the country were hit by another major shock. Greens co-leader Russel Norman has accused the Reserve Bank governor Graeme Wheeler of complacency and being stuck in the 1980s. This report confirms that Dr Norman’s credibility is under far greater threat.

The Greens are almost the only party in the western world calling for printing money, when the official cash rate is still well above zero. Quantitative easing is the last resort, not the first resort. They just want to print money to pay for their promises.

The problem is not so much the NZ dollar is too high. The US dollar and Euro are tanking because a generation of borrow and spend policies are crippling them. By contrast we are historically low against the Australian dollar.

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