Foss Craig: Debate on Crown Entities Public Organisations and  State Enterprises — In Committee 
Foss Craig: Debate on Crown Entities Public Organisations and  State Enterprises — In Committee 
[Volume:638;Page:8797] 
CRAIG FOSS (National—Tukituki) 
: 
 Thank you Mr Chairman— 
Hon Trevor Mallard 
: It’s Groundhog Day. 
CRAIG FOSS 
: It is Groundhog Day indeed. We are back here after a 3-week adjournment. I rise to speak about the Reserve Bank report. It is very timely that we are discussing the Reserve Bank report tonight given that there has been much publicity and discussion over recent weeks about monetary policy and about the Reserve Bank. In fact if we cast our minds back over the last year or two we will recall that there has been much discussion and conjecture about the role of the Reserve Bank and the results that fiscal policy have on monetary policy.  
The Reserve Bank is charged with many roles—amongst them looking after our banknotes and money in circulation etc. But it also looks after the management of monetary policy. As the report from the Reserve Bank to the Finance and Expenditure Committee states the Reserve Bank has had a pretty tough time. Dr Bollard is not the bad guy here. Dr Bollard the Governor of the Reserve Bank is not the bad guy. The buck—the inflationary buck rising interest buck and overpriced exchange rate buck—stops with the Minister of Finance Dr Cullen. The inflationary chickens have most certainly come home to roost. That process started probably about 6 or 7 years ago.  
Monetary policy does not operate in isolation. If one had read some reports over the last year one would think that perhaps it does but in fact it does not. Fiscal policy virtually totally drives the forces that drive the decisions on monetary policy within New Zealand. That is what the Reserve Bank is charged with doing. Most New Zealanders may think of the Reserve Bank as just raising interest rates and the exchange rate and as managing our banknotes etc. But the Reserve Bank in the last year has been very very busy. For example in the middle of the year it took a trip to Japan. Members may recall that at about that time the exchange rate of the New Zealand dollar was about 64c or 65c to the US dollar. At that time the Reserve Bank was trying to discourage the Japanese from investing in New Zealand to help perhaps to hold our exchange rate at the level of that time. It is worth noting that at the moment the exchange rate is about 74c to the US dollar I believe. It has gone up by another 9c—about 17 percent—over the past year.  
In New Zealand the Reserve Bank prides itself on its independence and on the transparency of monetary policy. So what has changed? What has changed over the past year? What has changed over the year of the Reserve Bank report that we are talking about? Why suddenly tomorrow—as Dr Cullen alluded to today in the Chamber—will the Finance and Expenditure Committee be asked for solutions around monetary policy? What an amazing admission of failure that is! Why has the Finance and Expenditure Committee suddenly been asked for solutions around monetary policy? What is going on there? There are many conflicting reports. Just last week we heard Dr Cullen say one thing Mr Mallard say another thing and the Prime Minister say another thing again. Who is in charge? Is it Dr Cullen Mr Mallard the Prime Minister or Dr Bollard? Who is actually in charge?  
The monetary conditions we have at the moment have been 7 years in the making. There is massive resource pressure and there are massive constraints within the economy. One can trace the origins of our current problems back to about 2000-01 when the price target agreement was changed. We moved from having hard barriers to inflation—which were once 0 to 2 percent—that provided certainty to New Zealanders New Zealand business and of course the Government accounts. We moved from that to a point where we have soft targets of 1 to 3 percent over the medium term which is defined as being about 3 years. That has given rise to the absolutely absurd situation that if yesterday’s consumer price index had come out at 10 percent for example as long as the Reserve Bank governor was forecasting inflation to come back to between 1 and 3 percent over the medium term then he would be doing his job. He would be entirely within his rights doing his job and fulfilling the obligations between him the board and the Minister of Finance.  
At about the time of that change we saw consumer price index inflationary expectations start to rise. As those expectations started to rise interest rates started to rise and funnily enough the exchange rate started to rise. We now have inflation expectations based around 3 percent. I ask someone to show me a wage claim salary claim or price increase that is less than 3 percent. That is now the base and it is absolutely cancerous to our economy. Just as an aside though members should imagine where the consumers price index would be if our exchange rate was actually 20 or 30 percent lower than it is.  
What is broken? What is broken in our monetary policy framework? It is actually working.