Innovation and Independence by John Singleton

Author:John Singleton [Singleton, John, Grimes, Arthur, Hawke, G. R. and Holmes, Frank]
Language: eng
Format: epub
Tags: History, Business and Economics
Publisher: Auckland University Press
Published: 2006-01-01T00:00:00+00:00

In October 1990 the National Party won the general election by a large margin. The new Minister of Finance, Ruth Richardson (left) was a strong supporter of the 1989 monetary policy framework, but her leader, Jim Bolger (next to her and accompanied by Bill Birch and Simon Upton), and some others in the party continued to have reservations, particularly when the economy drifted further into recession in 1991. When the economy started to recover in 1992, however, the new central banking regime attained wider acceptance. ALEXANDER TURNBULL LIBRARY, DOMINION POST COLLECTION, EP/1990/4372/21

The briefing paper recommended postponing the deadline for price stability until December 1993. The Bank hinted that this extension was designed to facilitate additional depreciation in the exchange rate, in the light of the large current account deficit, but only on condition that wage increases were contained.44 Somewhat to the Bank’s surprise, there was no reaction on the foreign exchange market to this announcement.

Ruth Richardson, National’s Finance spokesperson, was the main proponent of the 1989 Act within the Party. The leader, Jim Bolger, and his closest ally, Bill Birch, accepted the Act in a general sense, but did not share Richardson’s zeal. The recession would test the commitment of Bolger and many of his followers to the Act. Some National MPs, including Winston Peters, the future leader of New Zealand First, were strongly critical of the Act from the outset.

Richardson had only narrowly secured the support of the National caucus for the proposed Reserve Bank legislation in 1988. Early in 1990, moreover, Bolger announced that his priority as Prime Minister would be growth, not disinflation. He would try to reduce inflation in New Zealand to below the level of its major trading partners; only then would he push on towards 2 per cent inflation. After Bolger’s statement, market interest rates rose sharply. Richardson then persuaded her chastened leader to commit National to a target range of 0–2 per cent and a deadline of December 1993. Even so, doubts remained about National’s intentions. Not until after the election did Bolger confirm that Richardson would be Minister of Finance.45

Setting back the deadline to December 1993 suited both the Bank and the government. It was a relief that neither the media nor the overseas markets interpreted the December 1990 revision of the Policy Targets Agreement as a back-down.46

National’s first year in government was marked by a tough Budget, recession, and rising unemployment. Although some types of economic activity started to pick up in the second half of 1991, it was not until early 1992 that the recovery was reflected in official statistics. There was alarm within the higher reaches of Treasury during 1990–91.47 At the trough, even the IMF began to doubt whether New Zealand’s economic policies were sustainable, when it compared them to those of Argentina. In both cases, new policies had caused the real exchange rate to appreciate strongly, and the current account to deteriorate. The capital markets had turned against Argentina, and might also turn against New Zealand.48

The Bank

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