20 October 2005

Dr Alan Bollard
Governor
Reserve Bank of New Zealand
PO Box 2498
WELLINGTON

Dear Dr Bollard

Now that the structure of the new government is confirmed, the focus shifts to the inflationary pressure on the Policy Targets Agreement co-signed by yourself and the Minister of Finance.

As a Party which has had Members of Parliament and which anticipates once again being represented in the House, we have a responsibility to plead on behalf of the public whenever legislation is misinterpreted or misapplied. With action expected shortly re the Official Cash Rate, we ask you to reject this particular monetary instrument in favour of other counter-inflationary measures for the following reasons:

1. The PTA does not specify that the OCR must be the instrument employed.

2. To raise the OCR is to contravene 4b of the PTA i.e. “…the Bank shall implement monetary in a sustainable, consistent and transparent manner, and shall seek to avoid unnecessary instability in output, interest rates and the exchange rate.”

3. Raising the OCR adds to cost-push inflation as farms and businesses fail to absorb additional debt servicing expenses and pass these on into prices.

4. Raising the OCR affects the exchange rate by attracting overseas speculation in our dollar plus the kind of investment leading eventually to increases in the invisibles paid out.

5. Raising the OCR contravenes 1b of the PTA by negating the goal of higher real incomes for the majority while protecting and expanding the incomes of those for whom interest is a significant form of income. The goal of “a more equitable distribution of incomes” cannot be achieved when the returns to private owners of our public debt are put before the returns to labour and business entrepreneurship.

6. The OCR mechanism is too short-term and skews long-term outcomes.

In the light of these objections, we urge you to revive the monetary instrument once proven beneficial to the economy by the first Labour government: the judicious use of Reserve Bank public credit facilities for essential capital works.

We maintain on both economic and ethical grounds that sovereign debt must belong to the public, not to private financial concerns. The implementation of nil or very low interest credit lines for District Health Boards, local bodies and government departments would greatly relieve inflationary pressures by reducing public expenditure on compounding interest.

Of course credit lines would have to be scrupulously monitored with repayment schedules designed to be fairly as well as firmly applied but this is a matter of process rather than policy.

Our recommendations are supported by not only the PTA but by the Public Finance (State Sector Management) Act itself. Part 6 – 47 (1) and (2) reads “The Minister, on behalf of the Crown, may borrow money as it appears to the Minister to be necessary or expedient in the public interest to do so. The Minister may borrow money from any person, organisation or government (either within or outside New Zealand).”

The health and welfare of the people of New Zealand and their environment is most certainly “in the public interest”, hence our appeal to you to use your discretionary powers to hold inflation within the prescribed bounds by employing a superior instrument to the OCR.

Yours sincerely

Stephnie de Ruyterbr
Leader

John Pemberton
Deputy Leader