Our 2011 election manifesto - Labour Party

MAKING MONETARY POLICY WORK FOR EXPORTERS
Our vision
Labour wants to see a step change in our export performance. Changing our monetary
policy is one way we can help encourage investment in the productive exporting businesses
New Zealand needs to grow the economy and create jobs.
What is wrong with current monetary policy?
A volatile New Zealand dollar and persistently high interest rates are causing structural
problems for our economy.
Currently, the New Zealand dollar is one of the ten most traded currencies in the world. 43 In
fact the NZ dollar was traded more than currencies from economies much larger than ours,
including the Indian rupee, the Brazilian real and the Chinese renminbi.
This heavy trading is reflected in a highly volatile currency which makes doing business
more difficult for our exporters. Our exporters have to plan for the value of the dollar
changing at great speed and little predictability. When our exchange rate surges, it
undermines the competitiveness of our prices in destination markets. When the exchange
rate falls, the price of inputs like fuel can soar unexpectedly.
The current policy also skews investment away from the productive areas of the economy
through supporting internationally high interest rates. Higher interest rates put New Zealand
exporters at a disadvantage against overseas competitors who are able to fund their
activities at a lower cost. Foreign investors with access to cheaper capital also have a
distinct advantage over any New Zealand party forced to borrow at higher rates when
bidding for a New Zealand business.
Our current policy is not well designed to produce a stable and competitive exchange rate,
nor to keep interest rates as low as possible. In fact, it often operates the other way round.
When there is a surge in domestic demand, the policy response is to increase interest rates.
Ironically, higher interest rates attract even more inflows of foreign capital, which then gets
lent out and sometimes causes even stronger domestic demand.
This cycle increases New Zealand‟s overseas debt at the same time as punishing our most
productive businesses and first home-buyers; the two sectors that we least want to affect.
43 Bank for International Settlements, Triennial Central Bank Survey: Report on global foreign exchange market
activity in 2010, December 2010, p 12
343