'Hot' Money Driving The Exchange Rate Up

Tuesday, May 21st, 2002

Short term 'hot' money arriving to take advantage of our unnecessarily high interest rates is the only explanation why the New Zealand dollar is rising so rapidly.

The Employers & Manufacturers Association (Northern) said the rapid and ongoing rise in the value of the NZ dollar is occurring as commodity prices plummet.

"The speed of the NZ dollar's rise bears no relationship to the economy's real performance and mid term outlook," said EMA chief executive Alasdair Thompson.

"It represents a serious turn of events that will see exporters achieve
substantially lower returns this year.

"The Reserve Bank's signal that it wants to put the OCR into orbit at another per cent higher or more this year is encouraging hot money here from offshore to take advantage of our already high interest rates.

"The offshore funds managers are betting on a sure thing.

"US fund managers are borrowing in the US at 1.8 per cent, sending it here at US42/45 cents, lending it for 90 days at 5.5 per cent, and retrieving it at US46/48 cents, all by courtesy of our Reserve Bank.

"New Zealand has experienced this before. In the late 1980's the high interest rate-high exchange rate policy eventually bottomed out in the 1991 recession.

"In the mid 1990's another excessive rise in the dollar led exporters to stop developing offshore markets. The long term effects of the uncertainty it generated persist today.

"Offshore funds manager are also taking advantage of the predictably 'inflation throttling' approach of our Reserve Bank.

"Despite the fact that the rising dollar will cut the cost of imports and lower inflationary pressures, the Bank has not factored this in.

"The main countries we trade with, such as Australia, the US, and the UK have higher inflation targets than ours around 2.5 per cent. We target a 1.5 per cent mid point which is too tough.

"In a small open economy like ours vulnerable to speculators we're paying an extremely high price to squeeze out the last one per cent of inflation.

"In view of this repeating experience it's time to review the inflation target with a view of moving it to 2.5 per cent in line with our trading partners."
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