Intervention has not worked so what next?

Canterbury Manufacturers’ Association (CMA)

12 June 2007

Intervention has not worked so what does the RBNZ do next?

The Canterbury Manufacturers’ Association (CMA) says that the Reserve Bank’s intervention in the currency markets is an admission that we need more and better medicine to cure domestic inflation without the exchange rate side effect associated with the OCR.

“In a global economy we simply cannot sustain policy settings that carry such dire consequences for exporters and do little to influence the real target, domestic inflation”, says Chief Executive John Walley. “The OCR has a limited impact of giving the domestic economy a cold, how long can we depend on that approach when it is clear for anyone to see that the export sector in the latter stages of terminal pneumonia”.

“We need better alternatives, we need supplementary measures”.

“We can’t expect a single intervention to make a lasting difference, but yesterday’s move is finally an admission that supplementary measures are necessary and must be available. On the idea of intervention, if the rest of the world is happy to buy our paper, maybe we should keep printing our money?”

“The RBNZ’s action is recognition that monetary policy currently has some significant limitations. The problems around an overvalued dollar are more visible than the response of domestic inflationary pressure; the side effects are drowning any desired outcomes. The question is what happens next. If the RBNZ takes, as with the OCR, a low-key approach then the impact will be diluted instead of a clear, strong and consistent message to the markets”, says Mr. Walley.

“Theory has it that interventions do not work for long, so other medicines are necessary to deal with domestic inflation without the exchange rate side effect. This requires action on the part of the Government and not just the RBNZ. Yesterday’s move may have sent the right message, but what happened shows that such messages need to be delivered stronger and longer”.

ENDS

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