Exchange rate meddling not the panacea for world's woes

Media statement Friday, September 14, 2012

Exchange rate meddling not the panacea for world's woes

If you think tinkering with monetary policy will improve exchange rates for the New Zealand dollar, be careful what you wish for, says the Employers and Manufacturers Association (EMA) chief executive Kim Campbell.

"New measures by the US Federal Reserve to ease the pressure on mortgages and stimulate jobs growth - often referred to as 'printing money' - have lowered the value of the US dollar (USD), pushing ours up. That means our exports are worth less in monetary terms right now (but not in quality or long term value)."

The NZD has raced up to 83c against the USD and made some slight gains against the Australian dollar, worth 78.8c in Australia.

"But for New Zealand exporters the AUD has been lower than the USD for some years (the 10-year average cross-rate is 85c) and most of our trade is with Australia - which buys about 24 per cent of all merchandise exports, followed by China and then the US that buys about 9 per cent.

"Goods re-manufactured in New Zealand and sold in Australia benefit from this.

"Australians are hurting more than us today.

"And while much buying from overseas suppliers is done in US dollars, much selling isn't. It's done in Australian dollars, the euro, they yen and now even the Chinese currency Yuan Renminbi (CNY).

"Our still-lower value dollar makes our goods attractive to buy, even if per item this keeps our prices down sometimes, in some industries. Not that exporting at low prices per se is a good business model (but tell that to the Chinese)."

"Any intervention in these cross rates would have wide ramifications both internationally and at home.

"While many economists advise us that our dollar is over-valued, some of this is due in no small part to influences outside our control, eg, debt problems in the Euro-zone and economic slowdown in the US.

"The things that are in our control include re-examining how central and local government can avoid adding to inflationary pressures," says Mr Campbell.
Examples are:
* Freeing up the supply of land at local government level to make building a house more affordable.
* Ensuring tax policy takes account of its impact on monetary policy. For example, any new government spending should be assessed for its impact, both short-term and longer term, on inflation.
* Introducing a Regulatory Responsibility Act to improve the quality of regulation.
* Reducing government and private sector debt where appropriate (high debt drives up interest rates as lenders demand a risk premium) - we need to stay the course.

© Scoop Media