30 Apr 2014

Labour makes monetary policy change

5:59 am on 30 April 2014

The Labour Party is proposing fundamental changes to the way the Reserve Bank fights inflation in an effort to take pressure off interest rates and the high value of the dollar.

Under its policy announced on Tuesday morning, Labour would make KiwiSaver compulsory and consider increasing contribution levels to keep price rises under control.

The proposal would reduce people's spending power but increase their savings, the party said.

Labour's finance spokesperson David Parker said it would mean the Reserve Bank would not always have to raise interest rates to fight inflation and that would take pressure off the value of the dollar.

The Finance Minister Bill English said the policy won't work and will hurt low paid workers the most.

Mr Parker said Labour would ensure its policy did not disadvantage low income earners.

David Parker.

David Parker. Photo: LABOUR PARTY

Mr Parker said Labour would ensure they were not disadvantaged.

He said Labour would be careful to consider the effects on low paid workers but the party was also proposing increases to the minimum wage and a living wage.

After announcing the policy at a breakfast meeting in Auckland, Mr Parker said it would mean the Reserve Bank did not always have to raise interest rates to fight inflation.

"We currently undermine our exporters, we don't pay our way in the world because our currency's so high as well as having higher interest rates. This actually helps remedy all of those issues"

Mr Parker told Radio New Zealand's Morning Report programme current interest rates are a runaway train and getting them back to a sustainable level was key.

"We're going to give the Reserve Bank another mechanism, which is a variable savings rate through KiwiSaver.

"The Reserve Bank will be able to keep its inflation anchor but instead of that money being lost to you in higher interest rates it will go into your savings.

"The benefit for the export sector is instead of jacking up interest rates and pushing up the exchange rate you will still control inflation but you'll have lower interest rates and a better exchange rate."

Finance Minister Bill English.

Finance Minister Bill English. Photo: RNZ / Diego Opatowski

Mr Parker said it would apply to working people but Labour would consider excluding those on the lowest incomes.

Mr English said many people would be forced to contribute to a scheme they can't afford, the cost of living would go up and households would be hit twice.

"They're going to be forced to join a scheme, they're going to have the rate pushed up to nine percent and if it worked, according to Labour's policy, the dollar would drop and the cost of living would go up. Now that is a pretty toxic mix for households."

He said by using KiwiSaver contributions as a tool, the Reserve Bank could be changing payments every six weeks and there was no evidence the policy would have any impact on reining in the dollar.

Northern Employers and Manufacturers' Association chief executive Kim Campbell said the idea might be effective in curbing inflation and allow interest rates and the exchange rate to be kept lower.

"It mops up money in the discretionary part of the economy," he said. The policy was an interesting idea and he would like to see more of the detail.