A monetary policy focused solely on "price stability" (low inflation) is a one of the foundations of NeoLiberalism. Like the rest of the NeoLiberal consensus, this policy is very good for the rich - people like John Key don't see the value of their assets eroded by inflation. But its very, very bad for everyone else, with interest-rate driven spikes in unemployment and mortgage pain, and crashes in export earnings due to the resulting shifts in the exchange rate.
For the past twenty years, our major parties haven't cared about this. Since the passage of the Reserve Bank of New Zealand Act 1989, a monomaniacal focus on price stability has been part of a bipartisan NeoLiberal consensus between our two major political parties. Not any more. In a speech to Federated Farmers this morning, Labour leader Phil Goff declared that that consensus was over:
For twenty years since the Reserve Bank Act was passed, there has been a bipartisan consensus between National and Labour over the policy targets and the primacy of price stability. The consensus between us continues on the independence of the Bank.This isn't as radical as it sounds. One of Labour's first acts in government was to alter the Reserve Bank's Policy Targets Agreement to "avoid unnecessary instability in output, interest rates and the exchange rate". They subsequently adjusted it further, setting "full employment, higher real incomes and a more equitable distribution of incomes" as an objective of monetary policy and raising the floor of the Reserve Bank's inflation target range from 0 to 3 percent to 1 to 3 percent. Effectively, Labour used monetary policy to engineer and maintain the labour shortage which saw growth in real wages over its term (unsurprisingly, National reversed this policy immediately on becoming government, replacing "sustainable and balanced economic development" with growth uber alles and removing all mention of employment from the PTA).But today I am announcing the end of the consensus around the policy targets and tools of the Reserve Bank. Labour wants to see a step change in our export performance. We want policy that will keep our exchange rate as stable and competitive as possible. We want to reduce interest rates for businesses and home-owners, so that we put more money into the pockets of New Zealanders.
Working New Zealanders with mortgages will benefit from policy that tilts the emphasis away from its current sole concern with the holders of wealth, to a focus on creating wealth. Price stability and low inflation will still need to be important objectives for the Bank. We need to guard against people locking in higher expectations of price rises. The way they interact with other objectives will be an important part of our economic policy at the next election.
What Goff is signalling is a strengthening of their previous policy. Instead of running monetary policy for the benefit of the rich at the expense of everyone else, Labour looks set to run it for the benefit of the many. Preventing inflation will still be important, but it will have to be balanced against other goals such as employment and exchange-rate stability as well - just as it was pre-1989. And the result will be better for everyone - not just the rich.
