Broad Assessment Of Currency Trend Needed

"The rising value of the New Zealand dollar is affecting international competitiveness but the implications for economic management go much wider than monetary policy", the executive director of the New Zealand Business Roundtable, Roger Kerr, said today.

Mr Kerr said that the New Zealand economy needed a sharp competitive edge to perform strongly, and that the health of exporting industries should always be a prime focus of policymakers.

New Zealand had lost ground for several years in broad indexes of international competitiveness since the high point of the early to mid-1990s, and this did not augur well for the prospects of raising the long-term rate of economic growth. The OECD recently found that New Zealand had slipped from first place to thirteenth since 1999 on one indicator of government efficiency, and New Zealand's ranking for economic freedom has also fallen.

Policy deterioration had been partly reflected in the currency depreciation of the late 1990s, and the value of the real exchange rate – the actual exchange rate adjusted for changes in prices domestically and abroad – had fallen to well below its long-run average, temporarily boosting the economy in recent years.

"It is now back to around its average historical level and inevitably there will be ongoing upward and downward fluctuations. Exporters and policymakers simply have to live with that reality – no exchange rate regime has the power to alter it", Mr Kerr said.

"While there is always scope for fair debate about monetary policy settings, the fact that inflation has been near the top of the target range since 2000 and remains there suggests that the Reserve Bank has little room to move in the absence of broader policy changes.

"The best thing that policymakers can do to ease pressures on exporters is to address the more fundamental issues that have led to the deterioration in underlying competitiveness in recent years.

"These include excessive increases in government spending, poor quality spending, increases in taxes and user charges, costly new regulations – especially in the workplace – and a general lack of ongoing microeconomic reform.

"For their part, firms need to carefully manage their exposure to exchange rate risk, focus on productivity improvements, and control their cost structures, especially their unit labour costs relative to those of their competitors", Mr Kerr concluded.

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