Monetary Policy

The ILSS solution was researched and developed, from the original thinking, to introduce a suite of new instruments to replace sole dependence upon the failed OCR instrument.

The ILSS solution will introduce a suite of new and more effective instruments, to replace the failed OCR interest surcharge instrument with a savings surcharge also linked to interest rates. While the ILSS solution is original, it is not radical: it is the present failed methodology that is radical. It literally: gifts away New Zealanders' wealth to foreign lenders/depositors by the RBNZ self-imposing interest rates that are higher than global markets would otherwise require, by way of the OCR surcharge imposed on short-term interest rates; and it destroys wealth creation, especially in the vital export sector, as hot money carry trade funds flood into New Zealand chasing the high interest rates and thereby causing massive over-valuation and volatility of the New Zealand dollar.

To a degree this ILSS instrument mimics the OCR instrument, but with several key differences:

1. The present interest-based OCR surcharge, paid mostly to foreigners, is replaced by the savings-based ILSS surcharge instrument, with the collected new free savings funds deposited via the Reserve Bank into KiwiSaver, or into a new 'New Zealand Economic Stabilisation and Growth Fund'. The OCR is retained as a reserve instrument, to be used on rare occasions, if at all. ILSS recognises that domestic saving is the natural instrument to control inflation.

2. Thus the enormous 'voluntary' leakage of New Zealanders' wealth, given as effectively free gifts to foreigners by OCR surcharges, will cease. Kiwis will no longer be forced to gift their wealth to foreigners and then have to borrow back those gifted funds as foreign debt, to finance the consequently chronic external current account deficits. Instead, the funds will be retained as domestic savings to fund New Zealand’s economic growth.

3. In all but the most exceptional circumstances, this removes the Reserve Bank's interventions from the financial markets, leaving lenders and borrowers to price debt without the OCR distortions. The market sets all interest rates, free of distortions caused by OCR interventions. Therefore, ILSS is less interventionist.

4. With the removal of such interventions, the debt markets will operate freely without OCR distortions, so the foreign funds that New Zealand needs will always be available. The market will simply price interest rates on such borrowings, recognizing yield and risk differentiation, at the interest rates needed to obtain the required funds, no more. As the ILSS savings accumulate and the risk profile of New Zealand improves, market interest rates from foreign lenders will reduce, to further add to the prosperity of New Zealanders.

5. New Zealand will then pay no more than the minimum interest rates needed to obtain the funding it requires. It will no longer be unnecessarily gifting away its wealth to foreign savers/lenders.

6. Therefore, instead of by gifting and adding to the savings of foreigners, and then having to borrow back those gifted funds to finance the consequently worse external current account deficits, Kiwis will retain those savings as their own new free saved wealth.

7. The saved ILSS funds will need to be held long-term to avoid 'wealth effect' inflation and, to ensure the efficacy of ILSS as an instrument with which to combat inflation. The ILSS solution is a suite of instruments which allows discretionary selection to enable tailored responses to be made inflationary challenges, to ensure anti-inflation efficacy, without the destructive 'collateral damage' caused by the present failed OCR instrument. The ILSS has discretion as to the crediting of savings to either individual or nationalised accounts, to ensure its anti-inflation effectiveness.

8. Obviously, this immediately reduces the chronic external current account deficits, too, by: removing the cost of the OCR interest rate surcharges that are gifted to foreigners under present Reserve Bank methodology; and by removing exporters' greatest barrier to growth of exports: the OCR instrument and the economic distortions it causes. Without the attraction of the OCR surcharge, 'carry trades' will not over-inflate the currency and, in time, the currency's return to market value will allow export industries to revive and the current account deficit to reverse.

9. The OCR is retained as a reserve instrument, but in practice is unlikely to be used.

10. Both interest and exchange rates will float within free markets. The distortions created by the Reserve Bank interventions, both direct and indirect, will be removed.

11. The investment of the new free ILSS savings, combined with the better economic environment created by the ILSS solution, will provide powerful impetus for faster growth of the New Zealand, with low inflation, to also redress all of the consequences, economic and social, caused by New Zealand’s lagging economic performance.