John Key should stay out of the rate debate

For foreign exchange traders, there is nothing more interesting than speculating on central bank policies.



Changing interest rates obviously have an effect on exchange rates so traders need to follow the moves of the Federal Reserve, the European Central Bank, the Bank of Japan and sometimes even the Reserve Bank of New Zealand with interest. They will undoubtedly express their views on these matters.



It appears to be a habit that is hard to break, even for former foreign exchange traders. Just ask the Prime Minister.



John Key just felt the need to comment on the inflation rate and what it should mean for the RBNZ’s policy (not the first time since becoming a politician, one might add). According to Key, inflation at currently 0.8 percent has dropped to a level which is too far below the target midpoint of 2 per cent. This should enable the RBNZ to cut interest rates, he argues.



Key’s remarks were interpreted as a “shot across Reserve Bank governor Graeme Wheeler’s bows,” according to the Dominion Post. They could also be seen as a threat to the RBNZ’s independence -- and that is why Key’s remarks are lacking good judgment.



The RBNZ’s Policy Target Agreements defines price stability as “annual increases in the Consumers Price Index (CPI) of between 1 and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint”. With this target, there appears to be some downwards room for manoeuvre for the official cash rate.



However, the issue is not whether Key has a point in his analysis of the monetary situation. The issue is that this is not John Key, the currency expert, speaking but John Key, the Prime Minister.



If the Reserve Bank’s independence should be taken seriously, there cannot even be the cloud of a doubt hanging over it. This means that government officials from the Prime Minister down should not comment on what the RBNZ should or should not do. Since it is them who might take independence away, they should not express expectations, let alone disagreement with our central bankers’ decisions.



Politicians’ interference with monetary policy is necessarily more self-interested than central bankers’ commitment to price stability, in any case. For politicians in government, low interest rates are helpful since they boost economic growth and save borrowers cash, which is precisely why they should not play any role in setting interest rates.



Speculating and commenting on central banks’ next moves is something for foreign exchange traders, not Prime Ministers.

This article originally appeared on the New Zealand Initiative and is reproduced with permission.