N.Z. Labour Party Proposes New RBNZ Tool to Control Inflation

New Zealand’s Labour Party will give the central bank an alternative tool for controlling inflation if it wins this year’s election, in what it says would be a world first.

Labour will give the Reserve Bank the ability to change the rate of a national pension savings program, finance spokesman David Parker said in a statement today. The RBNZ could use the new tool as an alternative to the official cash rate to “take the heat out of the economy,” Parker said.

Labour wants to keep interest rates lower and take pressure off the exchange rate, while improving New Zealand’s external balance. Monetary policy is shaping as a key battleground for the Sept. 20 election after RBNZ Governor Graeme Wheeler last week raised interest rates for the second time in two months.

“We have fundamentally higher interest rates than are paid by countries overseas,” Parker told Radio New Zealand. “We need to get interest rates back to a sustainable level, which will also take pressure off the exchange rate.”

At 85.38 U.S. cents, the New Zealand dollar is about three cents shy of its post-float high. If Labour’s policy succeeded in reducing the exchange rate, it would hit low-income households with a “toxic mix” of increased import prices and higher imposed savings, Finance Minister Bill English told Radio New Zealand.

An RBNZ spokesman said it would be inappropriate for the central bank to comment.

Compulsory Savings

Labour proposes making the current KiwiSaver pension savings program compulsory for all income earners. It would give the RBNZ a new tool called the variable savings rate, or VSR, allowing the central bank to recommend changes to KiwiSaver savings rates.

That could be used to stimulate or curb economic activity instead of official interest rates. Any money withdrawn from the system would also remain in New Zealand rather than going overseas in the form of higher mortgage payments to Australian-owned banks, Parker said.

The Reserve Bank would remain independent and its ability to control inflation would not be compromised, he said. The bank was a pioneer of inflation targeting in the 1980s, and Labour’s proposal is another world first, Parker said.

“I can’t see how the Reserve Bank can target both inflation and the external balance,” said Cameron Bagrie, chief New Zealand economist at ANZ Bank Ltd. in Wellington. “In regard to using KiwiSaver as a tool, that will turn into a political bunfight.”

Political Support

While Prime Minister John Key’s National Party is the most popular in opinion polls, there’s a chance Labour could form the next government in partnership with the Green Party and the support of a smaller party such as New Zealand First. All of those parties advocate changing the central bank’s remit.

The bank’s current mandate is to ensure price stability by keeping inflation near the midpoint of its 1 percent-to-3 percent target range. Labour would retain that target, Parker said.

“The primary target is still inflation,” said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington. “There’s nothing in this about monetary policy that international investors need to panic about.”

Wheeler has raised the official cash rate to 3 percent after it sat at a record-low 2.5 percent for three years. He said last month that the rate may rise to about 4.5 percent by early 2016.

Parker said changes to the RBNZ’s objectives sit alongside other Labour policies designed to reduce price pressures. It plans to regulate the electricity industry to curb power prices, and will introduce a capital gains tax to prevent speculative investment in housing.

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