Price Stability – what price stability?

16 July 2008
Price Stability – what price stability?

The New Zealand Manufacturers and Exporters Association (NZMEA) are calling for greater emphasis on the price stability of interest and exchange rates. In a DHL survey, a quarter of exporters indicated that they would move at least part of their business offshore in the next two years, despite the prospect of conditions improving for exporters over that timeframe. This indicates that current monetary policy is unsustainable and is driving productive investment out of New Zealand.

The Reserve Bank tries to control inflation by using interest rates to restrict the money supply. This drives interest rates up attracting speculative foreign investment, which in turn drives up the exchange rate. We are now approaching the tipping point where the domestic economy will stall, interest rates will be cut and the exchange rate will fall. These are the classic conditions for an ‘export lead recovery’ but that can only occur if exporters can justify making long-term investments in activities based in New Zealand. [‘Innovation, Growth and the High Cash Rate’, http://www.mea.org.nz/document.ashx?id=38]

NZMEA Chief Executive John Walley says, “The scary thing is the strength of these sentiments at this point in the cycle, when the dollar is about to drop and conditions will be more favourable for exporters. Those involved in the tradeable sector have been battered by adverse exchange and interest rates over the economic cycle causing them to give up on New Zealand. Who could blame them for moving to countries with greater support and certainty?”

“The BNZ headline ‘rate cuts as inflation hits 5%’ says it all. It is hard to see the benefits but the collateral damage to the real economy is clear to anyone who cares to look.”

Evidence shows that the pain of the economic cycle is spreading from the external to the domestic sector. The latest changes show the service sector is starting to crack as producers slow and look elsewhere. Often the services consumed by producers are underestimated, as is the dependence of the domestic sector on the success of our exporters.

“Monetary policy has not managed to constrain the money supply and interest rates cannot influence the price of oil or the price of food. Therefore, our attention must swing to the supply side of the economy. Stability is needed for interest and exchange rates to promote long term productive investment,” says Mr. Walley.

“If we put rules in place that will allow stable long-term investment, we will see these exporters invest in New Zealand, rather than moving offshore.”

ENDS

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