World Economy

NZ Reserve Bank Facing Biggest Challenge

NZ Reserve Bank Facing Biggest ChallengeNZ Reserve Bank Facing Biggest Challenge

The Reserve Bank of New Zealand (RBNZ) is facing the biggest challenge to its mandate since it pioneered inflation targeting 25 years ago.

With polls showing national elections on Sept. 20 will be close, the main opposition Labor Party wants the central bank to target the current-account deficit in addition to inflation, and use pension contributions as a new policy tool.

“Our currency is overvalued and we’ve got structurally higher interest rates than the rest of the world,” Bloomberg quoted Labor finance spokesman David Parker as saying. “It’s time to remind ourselves that the control of inflation is in support of a stronger economy and higher growth rates, it’s not an end in itself.”

The Reserve Bank was first among developed peers to raise interest rates this year, sending the kiwi dollar to near-record levels and spurring criticism from the opposition that the policy is driving manufacturers out of business. In an effort to lower rates and weaken the currency, Labour is pledging to broaden the RBNZ’s policy goal by re-writing its main objective in the Reserve Bank of New Zealand Act of 1989.

The RBNZ will leave its benchmark rate at 3.5 percent tomorrow, according to all 13 economists in a Bloomberg News survey. That’s higher than the biggest developed economies. Governor Graeme Wheeler, who’s raised the rate four times this year, probably will resume tightening in the first quarter of 2015, the survey shows.

Pioneer Role

After the 1989 Act made price stability the RBNZ’s main focus, it adopted an explicit inflation target in 1990, pioneering a model that is widely used today. Inflation slowed to an average of 2.2 percent in the 20 years through 2010 from 12 percent in the preceding two decades, according to data compiled by Bloomberg.

“New Zealand is held up as one of the shining lights of central banking,” said Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research in Auckland. Labor’s changes “would be quite a big departure from where we have been, but also a departure from what others are trying to do, which is move towards our model,” he said.

Under Labor’s proposal, the bank would remain independent and retain its inflation target range of 1 percent to 3 percent. Additionally, the RBNZ would be required to maintain stable prices “in a manner which best assists in achieving a positive external balance.”