OCR cut as inflation surges past 5%

24 July 2008

OCR cut as inflation surges past 5%

The New Zealand Manufacturers and Exporters Association (NZMEA) welcomes the Reserve Bank’s 25 basis point cut of the Official Cash Rate (OCR). The cut will provide much needed relief for exporters but continuing cost pressure remains, reducing the efficacy of monetary policy in controlling inflation.

As the OCR moves down it is likely that domestic interest rates will lag but the exchange rate is already falling which will, at long last, start to improve exporter returns on US dollar sales. Unfortunately it will also increase the cost of imported goods as mentioned in today’s statement from the RBNZ.

NZMEA Chief Executive John Walley says, “The forces affecting our economy have changed. We are almost seeing a repeat of the conditions in the 70s and 80s where cost increases, rather than increasing demand, pushed inflation upwards. Since then monetary policy has focused on demand and has seemed to return low inflation, albeit in a period of low global cost pressures. Over the past few years however, monetary policy has painted us all into the corner of falling capacity in the tradeable economy and credit driven consumer demand.”

“In the new credit limited, cost driven world, where inflationary pressures are detached from the domestic economy, the monetary policy implemented via the OCR is increasingly ineffective - we need an urgent review of the Reserve Bank Act and how we seek to deal with the new inflationary landscape.”

“The problem for policy makers is that the OCR is having little affect on the domestic economy. Banks are struggling due to the global credit crunch so they are not likely to drop their rates any time soon,” says Mr. Walley.

“In the medium to long term we will see another damaging cycle with volatile exchange and interest rates, making it difficult for those involved in the tradeable sector to invest with any certainty.”

“If we want our living standards to match our ‘peers’ then there needs to be a focus on our real economy and a plan to reduce our trade balance deficit. We need to see a policy framework that supports our tradeable sector.”

The New Zealand Manufacturers and Exporters Association (NZMEA) is a national organisation that was founded by the Canterbury Manufacturers Association (CMA) and the New Zealand Engineers Federation (NZEF). The Association is the only group in New Zealand that gives a focused and independent voice to manufacturers and exporters. Association members make nearly $2.0 billion in sales and have an export value of around $1.0 billion. Our organisation can trace its existence back to the early history of New Zealand.

As a legacy of the hard work and careful financial management of the past, we have a significant asset base that enables our independence and extends our activity. Subscriptions fund only a small part of our current operating costs.

Membership is open to all manufacturers and exporters and others at the discretion of our Council. Enquiries should be directed to mea@mea.org.nz

ENDS

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