Huo Raymond: Motions — Reserve Bank Funding Agreement—Ratification 
Huo Raymond: Motions — Reserve Bank Funding Agreement—Ratification 
[Volume:665;Page:12465] 
RAYMOND HUO (Labour) 
: 
 Section 159 of the Reserve Bank of New Zealand Act 1989 requires the Governor of the Reserve Bank and the Minister of Finance to enter into agreements that provide funding for the bank’s activities. The agreement is a 5-yearly one that specifies how much of the bank’s revenues can be retained by the bank to meet its operating costs with the remainder going to the Government. Such funding agreements become effective in law only when they are ratified by Parliament and that is why we are here to debate the relevant issues. 
Labour supports this motion but we reiterate that it is a missed opportunity to address one of the critical economic issues facing New Zealand and that is our monetary policy setting. In 2009 the Labour Party withdrew from the cross-party consensus on monetary policy. Labour believes that the policy is in need of reform and that it has been one of the underlying limits on our economic performance relative to wealthier developed countries. 
I recently listened to the Hon David Parker when he spoke to the New Zealand Manufacturers and Exporters Association in Auckland in June. The heading of his talk says it all: “Monetary Policy Reform for an Export-led Economy: Labour’s direction”. The efforts of the Reserve Bank to rein in inflation were formalised by the late 1980s. By then New Zealand had been suffering from high and erratic inflation averaging between 10 and 15 percent for close to two decades. The Reserve Bank was given independence and a mandate to pursue price stability to preserve New Zealand’s purchasing power. However as argued by the Hon David Parker it is at the very least arguable that the New Zealand prescription of monetary policy was applied in too Draconian a fashion in terms of how high interest rates were pushed and in too lax a fashion in terms of credit flows into New Zealand. 
The New Zealand export sector is roughly 30 percent of GDP or about $40 billion. Broadly primary production processed primary production and manufactured goods each contribute one-third of New Zealand’s export sales. According to the New Zealand Manufacturers and Exporters Association our tradable sector has been in decline since 2003. New Zealand has slipped in OECD rankings from 5th in 1950 to 23rd in 2007 and well into the lower-middle bracket of global income per capita. Much of the decline of the tradable sector can be attributed to currency instability and uncertain returns in the medium term for efforts in export markets. 
It is worth noting that a 1 percent change in our terms of trade can have an impact of around $400 million and we have witnessed changes of over 30 percent a month. Furthermore if our economy fails to develop and instead produces ever-simpler products we will not develop skills in our labour force and we will see local wealth polarisation. We will all be part of an ever-poor New Zealand and we will witness a widening gap between what the world has to offer and what New Zealand can afford in health infrastructure and general consumption. 
I agree with the New Zealand Manufacturers and Exporters Association that New Zealand is too small an economy to amortise the research and development costs associated with added-value products on sales to our domestic market. To recover the costs of added-value development New Zealand must sell to the world. Only successful export and trade can increase wealth and improve our living standards. 
As a member of the Finance and Expenditure Committee I had the privilege of participating in the parliamentary banking inquiry initiated by Labour Progressive and the Greens. The submission by the New Zealand Manufacturers and Exporters Association is worth noting. It said: “The “must-trade” imperative must be at the forefront of our policy design if greater investment and consequently higher growth and productivity in the export sector and ultimately our entire economy is to be anticipated.” The inquiry found that our commercial banks which are largely owned by Australians did not pass on the full effect of reductions in the official cash rate to their customers. 
Statistical evidence produced to the inquiry showed that although most interest rates have fallen since the global financial crisis began major banks had not passed on the full impact of official cash rate cuts into short-term interest rates charged to customers. As the Hon David Cunliffe who chaired the inquiry said the Government failed in its responsibilities to hard-working Kiwi families and taxpayers by refusing to even take part in a bipartisan inquiry. 
The inquiry recommended more policy work to explore reforms to better align bank supervision monetary and taxation policies. It is appropriate for me to emphasise what the Progressive party leader the Hon Jim Anderton said during the inquiry—that party politics should be put aside in search of monetary policy that supports people who produce tradable goods rather than those who speculate on property and take the profits offshore. 
Although the Reserve Bank cut the official cash rate from its high in mid-2008 of 8.25 percent to only 2.5 percent banks kept a 1 percent margin in interest rates for themselves. 
Hon Gerry Brownlee 
: Free Tibet. 
RAYMOND HUO 
: The reality is if that member is interested in knowing that 1 percent extra interest adds $787 million in costs for New Zealand businesses $460 million extra to the cost of loans in the farming sector and $1.6 billion to the cost of mortgage repayments. 
Hon Gerry Brownlee 
: What about Tibet? 
RAYMOND HUO 
: Well I welcome the member to the debate if he wishes to join in. 
So what should we do? I ask that member whether he is really interested in knowing. In March 2004 Labour introduced an important change to enable the bank to pursue a more active role in foreign exchange markets. This assisted the economy by tempering exchange rate volatility and moving New Zealand monetary management closer to Australian practice. 
Another important change we would make as the Hon David Parker noted in his speech would be to amend the Reserve Bank of New Zealand Act to broaden its objectives. The objectives of the Reserve Bank of Australia are the stability of the currency of Australia the maintenance of full employment in Australia and the economic prosperity and welfare of the people of Australia. In contrast our Reserve Bank is tasked solely with maintaining stability in the general level of prices. 
Changing the objectives in the Act will not in itself sort out the problems we are faced with. It is a necessary but not sufficient part of reforming monetary policy. As the Hon David Parker pointed out focusing on the medium term not on the short term helps. The core assets ratio can help reduce risk in our financial systems by anchoring reserve assets in known risk classes with a minimum onshore deposit funding requirement. This will share the load borne by the official cash rate. It can also create a stronger demand for domestic savings. Further Mr Parker indicated areas Labour would not change. Labour will not undermine independence will not widen the inflation target range will not introduce a mortgage interest levy and will not introduce a variable goods and services tax. 
When Reserve Bank governor Dr Alan Bollard released on 30 June the Reserve Bank’s statement of intent for 2010 to 2013 he acknowledged that there was likely to be a debate on the role of monetary policy in managing financial misalignments. It is good news that Dr Bollard has confirmed that the Reserve Bank has been investigating the potential for other policy tools to help support its traditional official cash rate instrument in monetary policy and will continue to look. Thank you. 
Motion agreed to.