Nov. 19 (Bloomberg) -- New Zealand’s main opposition Labour Party will no longer support the central bank’s primary policy of targeting inflation, saying it wants a competitive exchange rate and lower borrowing costs.

“Labour wants to see a step change in our export performance,” leader Phil Goff said in a speech to farmers in Wellington today. “We want policy that will keep our exchange rate as stable and competitive as possible.”

Labour and the governing National Party have agreed for the past 20 years that the central bank be independent of the government and that it use interest rates to target inflation. The Reserve Bank was criticized by exporters for pushing the currency too high after it raised interest rates in 2007 to curb a housing boom and combat inflation.

“The system we have causes widespread damage to the tradable sector,” said Goff. “Our Reserve Bank policy targets are not well designed to produce a stable and competitive exchange rate, nor to keep interest rates as low as possible.”

Central bank Governor Alan Bollard has kept the official cash rate at a record-low 2.5 percent since April. Still, the New Zealand dollar has surged 23 percent against the U.S. currency in the past six months, curbing exports and hampering the recovery from a recession.

Bank Independence

Bollard has said the strong exchange rate reflects U.S. dollar weakness and rising global commodity prices, and that cutting interest rate further would be unlikely to reduce demand for the currency from investors.

Labour will continue to support the independence of the Reserve Bank and said price stability will still need to be an important objective. It hasn’t yet decided what its policy will be and will consult widely before drawing it up, Goff said.

Goff’s party lost the general election last year and had just 29 percent support in a Roy Morgan Research poll taken in late October. National had 56 percent support. The next election will be in 2011.

Goff’s comments lack detail and appear to be threatening a monetary policy framework that is working, said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington.

“There is some weird perception the Reserve Bank is anti- growth when in fact it’s not,” said Ebert. “The framework is the best practice that we know of to help maximize growth over the medium term.”

Housing Bubble

Bollard last week said the central bank is introducing rules requiring banks to reduce their borrowing in international money markets, which may in turn limit their lending to the housing market and avoid a housing bubble.

These sorts of regulatory changes may allow scope for Bollard to keep the benchmark interest rate lower than he otherwise would, said Cameron Bagrie, chief economist at ANZ National Bank Ltd. in Wellington.

“Changes are already taking place,” he said. “What we’re seeing is a scenario where monetary policy is getting a few mates. That’s where the debate needs to focus.”

Reserve Bank of New Zealand spokesman Mike Hannah said the bank had no comment to make on Goff’s statement.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

Last Updated: November 18, 2009 22:45 EST