OCR just a rod for exporters' backs, says Productive Economy Council

Tuesday, September 8, 2009 -The OCR has become a rod with which Dr Bollard can beat exporters while he remains powerless to punish speculators and banks, says the Productive Economy Council (PEC) in reference to the pending RBNZ statement out this week.

“The reports today suggest the recession is over for the average New Zealander and that may well be true. The housing market has again started to take off and bank lending follows. Yet the green shoots of economic recovery are still so fragile that any decent frost will wipe them out. The tradable economy (Exporters) is hurting more now than at the beginning of the recession and Dr Bollard must surely know that. As a result his options are actually very limited”, says Selwyn Pellett, spokesman for the Productive Economy Council.

Contractually he is obliged to keep the internal inflation between 0% and 4% but as the graph below (courtesy of NZMEA) shows varying the Official Cash Rate (OCR) only affects the export sector, while non-tradable inflation remains unaffected.

"We know Dr Bollard wants more tools, as does Treasury, so why isn’t it happening?” asks Pellett. “Do we really want to kill our exporters to restrain another round of housing inflation.” “We have been saying for some time that we are selling New Zealand paddock by paddock and room by room and the information released by BERL below as part of the banking enquiry shows this very clearly.

Our equity as a nation is declining thanks to bank lending on inflated property. Debt to GDP is now running around 150% and climbing” says Pellett.

"As a result Dr Bollard must want to lift the OCR dramatically to signal he will not tolerate a return to the housing led inflation bubble we have just been through. But he knows if he does that the dollar will increase ever skyward and kill the stumbling export-led recovery. He is painfully aware that for every 1% increase in the exchange rate, exporters and the country lose at least $200 million in straight gross profit. That’s money arriving into our economy with no debt attached, money that can over time deal to our National Debt” says Pellett.

"The cycle shown in the diagram below is nothing new and we are entering it all over again. Unless we give Dr Bollard some new tools he is rapidly going to become "Dr Death" to the export sector through no fault of his own" says Pellett.

"We are habitually told that the dollar is outside of our control, which just isn’t the case. Our research shows that our monetary policy, our small and totally open economy, our preponderance to property speculation and the tax incentives that fuel that speculation are the cause of the dollar's volatility. If we fix these boundary conditions we can help control that volatility” says Pellett. "The Banks play on our openness and our policies to the detriment of our national interests.

This is exacerbated by the lack of a strong local bank (Kiwi Bank has less than 10% market share) - we have lost our economic sovereignty. We had the second highest traded currency relative to GDP in 2007 and every FX trader knows why," says Pellett. The PEC's research shows that since floating, the New Zealand dollar has become one of the most volatile currencies in the world. The graph below shows just how volatile it has been in the last 12 months relative to countries that don’t run New Zealand's form of monetary policy. Only Australia, with an identical monetary policy, challenges New Zealand for first place with a 44% variation in value relative to USD.

"Economic Sovereignty is an issue that all New Zealanders should be concerned about but if you don’t know you’ve lost it I guess it’s hard to protest about it," says Pellett.

"Our distortionary tax and monetary policy have seen New Zealand’s national debt increase to the net 150% of GDP as foreign banks take the opportunity to lend ever-increasing amounts of money for the same asset. As the two graphs below show we effectively sell our ever inflating properties with everincreasing debt to foreign banks, paddock by paddock and room by room. The misconception out there is that the government is responsible for national debt but it’s clearly not the case; private and corporate debt has caused this issue not the current or last government." says Pellett.

The net effect of all these policies is shown below in the decline of New Zealand’s Net International Asset Position "The time has come to hold our politicians to account. Banks and speculators continue to serve their own interests while all the time New Zealand's economic sovereignty is being eroded due to bad government decisions and poor policy setting" says Pellett. "This week Dr Bollard will have no choice but to let housing run away or destroy the export sector. This shows that our monetary policy is totally inadequate for the task at hand. As the majority of submissions last week at the banking enquiry showed, the time for tinkering is past. It’s time for urgent and substantial structural change."

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