Cunliffe David: Motions — Reserve Bank Funding Agreement—Ratification 
Cunliffe David: Motions — Reserve Bank Funding Agreement—Ratification 
[Volume:665;Page:12456] 
Hon DAVID CUNLIFFE (Labour—New Lynn) 
: 
 Labour supports this motion and recognises the valuable role that the Reserve Bank of New Zealand plays in conducting monetary policy and prudential policy and as the Minister has correctly pointed out being the custodian of New Zealand’s single largest financial institution and portfolio. This provides an opportunity to commend the bank for the admirable role it has played during this period of significant tension and challenge. It is largely thanks to the bank that New Zealand has come through this period of monetary crisis— 
Hon David Parker 
: And the prior Government. 
Hon DAVID CUNLIFFE 
: —and the prior Government; Mr Parker is quite right—in the good shape that it has. 
In saying that the Labour Opposition supports this motion it is very important to note that this motion represents an extraordinary wasted opportunity. The Prime Minister has said that New Zealand has the best monetary policy in the world and Mr English has said that there is absolutely no reason to change any aspect of monetary policy in New Zealand. What is fascinating is that those two speakers are now increasingly isolated in a world that has responded to the recent global financial crisis by a fundamental review of monetary settings and institutions. 
In these brief remarks today Labour will set out the nature of the problem the effects on the New Zealand economy the moves that Labour is making to seek policy reform in this area and an outline of the approach that we will be taking when returned to Government. Very simply Labour is on the side of the real New Zealand economy. Labour is not on the side of soft-shoe speculators who have been in many cases profiteering from the stress that the financial crisis has placed on ordinary New Zealanders. The reason they have been able to do that is that we are still using a monetary framework that was designed for a previous time under previous conditions and is now overdue for reform. 
What is the nature of the problem? The problem is that the New Zealand dollar is highly traded—so highly traded that it is one of the most highly traded currencies in the world in absolute terms. It comes in ahead of Mexico’s currency and Singapore’s currency. It comes in ahead of the yuan the South African rand the krona the rouble the Indian rupee the renminbi and the Brazilian real. Some of the major economies of the world are dwarfed by the trade in the little old flightless Kiwi dollar. It is extraordinary. 
The question that must be asked is firstly why this occurs and what effect it has. Traders have been telling us that one of the reasons the New Zealand dollar is so extremely highly traded is that it is such a clean float. There is almost no intervention—or very seldom—in the operation of the foreign exchange markets. We have a very clear and hands-off policy framework and that reduces some of the business and financial risk for the speculation industry. That is inappropriate in light of the effects. 
One of the effects is that we have made worse the volatility of our exchange rate. We would be the first to admit that the volatility is driven by a range of factors some of which are beyond our control. Some of them are the risk preferences of foreign institution investors but some of them could be attenuated if we had a regime that provided stricter oversight on speculation. Of course we have an average level of our exchange rate that has partly been fed by the financial inflows. The effect has been to inhibit exports to undermine New Zealand’s real economy to benefit the banking sector and to contribute to the real estate bubble that has been extreme in New Zealand to everybody’s detriment. We have had a single-tool single-goal approach that is now increasingly looking archaic in an international context. 
The second problem is that the world has changed but New Zealand’s Government has not caught up. Even the Reserve Bank has acknowledged this in recent  
Bulletin 
 articles and in statements by the governor. For change we have institutions like the International Monetary Fund the G-20 the Basel committee on banking the Bank of Japan the Reserve Bank of Australia the Federal Reserve Board in New York arguably the Reserve Bank of New Zealand and the New Zealand Labour Party for sure. Against change we have John Key and Bill English and possibly the Bank of England. That is a pretty small group. 
What would Labour do? Labour has been working on this problem since last year when we announced that we believed reform was essential. Our leader Phil Goff made public statements that Labour was withdrawing from the previous consensus and I underline “previous consensus” because I believe that it no longer exists now in any case. We set up a thoroughgoing research process which has been led by my colleague the Hon David Parker and in recent weeks in speeches made by David Parker and our leader the Hon Phil Goff Labour has set out its new approach. 
First we would move beyond the single-tool single-goal approach. We will do that responsibly. We will retain the independence of our full service and well-run Reserve Bank. We will retain the primary focus on inflation control and we will retain the 1 to 3 percent target range. But we will change the Reserve Bank of New Zealand Act. We will review the Act and change the goals and objectives to more closely mirror those of our near neighbour the Reserve Bank of Australia which includes growth employment and giving benefit to the sovereign territory of Australia amongst its objectives. We believe that having similar goals in New Zealand is important. 
We would change the policy targets agreement to reflect that new approach and we would broaden the tool kit in several respects. The Reserve Bank of New Zealand has elaborated important change in the area of macro-prudential policy and has in our view rightly advocated that this should be used in a counter-cyclical manner to assist the official cash rate to stabilise monetary conditions. We agree. We believe it would be proper for this Parliament to agree through an amendment to the Reserve Bank of New Zealand Act that specifically provided for an important counter-cyclical role for macro-prudential policies such as the core assets ratio because at present it can be used—arguably with a little bit of sleight of hand—by saying that it is only a secondary effect of direct prudential policy. We think that a more transparent approach would be appropriate in the new international environment. 
We are giving active consideration to the imposition of a tax wedge on international borrowing as recommended by the Reserve Bank in a previous review. We have excluded the imposition of a variable rate goods and services tax. We have excluded any consideration of a mortgage interest levy. We have excluded widening the inflation target range. We would encourage a more active role being taken by the Reserve Bank of New Zealand Act in the operation of the international New Zealand dollar currency market. 
We have excluded pegging or banding the New Zealand dollar in a strict sense but we believe that the New Zealand Reserve Bank is amongst a very small number of institutions that take such a hands-off approach that it reduces the business risk to speculators and makes volatility of the New Zealand dollar worse by attracting more speculators to our currency. We would note that on the few occasions when the bank has employed its intervention and stabilisation fund according to the current policy targets agreement it has made a handsome multi-hundred-million-dollar profit which it has returned to the taxpayer in the form of a dividend. So we do not accept given the skills of our central bank that it would be impossible for it to repeat the performance on average with more consistent intervention to impose more costs on speculation. 
We will be following the further evolution of the G-20 commitments and the G-20 reform process and we will be looking to support as the Minister has indicated the prudential role of the bank in insurance and the non-bank financial sector. 
In summing up I say that around the world in the wake of the global financial crisis Governments of developed countries know that monetary policy must change—that is all Governments apparently except the New Zealand Government where we have a Prime Minister and a Minister of Finance who are still stubbornly pretending that the tide can be stopped on the beach and that Canute is alive and well. Monetary policy needs reform.