Canterbury Manufacturers’ Association
7 March 2007
Keep doing the same things expecting different results…
The Canterbury Manufacturers’ Association says that the Reserve Bank and the Government need to implement a more
comprehensive and coherent response towards inflation. The CMA does not favour the lifting of the OCR but says that
while an aggressive move would mean acute pain for the tradable sector of the economy, the current drawn out and timid
approach is killing exporters with “the death of a 1000 cuts” (days) as balance sheets slowly bleed out.
“The reality of the situation is that there is a long way to go before we see a drop in the OCR, as much as that would
be welcomed by exporters, particularly the majority who cannot live with a high dollar”, says Chief Executive John
Walley. “But what we have at the moment is an economy that appears caught between “a rock and hard place”. There is
still strong growth in the housing sector, yet the Reserve Bank’s timid use of the OCR is continuing to drag out the
problems for the export sector. While this week’s announcement might make things worse, the chances are that the damage
is done (we hope) for this cycle. Do we have to repeat the experience again? Or can we learn and develop a better
measurement of, and policy response to, inflation?”
Mr Walley says that in the absence of Government leadership on the issue of other inflation control measures, such as
the mortgage levy, the Reserve Bank will have to further lever the OCR to change people’s expectations as to what the
real interest rates could have on their future disposable income.
“People look at their own balance sheets to determine their future investments and acceptable level of risk. If they
decide that an increase in their future income and value of their property can offset the cost of further borrowing,
then they will not be deterred by strong words and threats of future action. The RBNZ’s historical approach of small
moves whilst waving the big stick, provides international investors with the confidence that the interest rate spread is
here to stay for some time”, says Mr Walley.
Mr Walley says that in recent years, the US Federal Reserve has moved decisively to adjust interest rate settings
according to inflationary signals flowing from asset yields, not prices, and using a more balanced treatment of earned
income and capital gains. The US has inflation under control at 2.5%.
“The lesson for New Zealand is that our central bank needs to be aggressive in the use of what it has and maybe be a
little less predictable over the medium term. It may now be too late for some, but do we have to repeat the experience
of the past years in the future? There is a need for deeper Government policy reform to support strong export-led
growth, but until we see political leadership that is ready and willing to seek alternatives and supplements to the OCR,
then we will keep doing the same things expecting different results, a manifest triumph of hope over experience”.
ENDS