Government rethink on interest rate policy

Media Release 3 July 2008.

Government rethink on interest rate policy.

The New Zealand Manufacturers and Exporters Association (NZMEA) supports the move by the Government to change the way the Reserve Bank deals with inflation but stresses the need for action. Trevor Mallard announced in parliament that, “The Government is open to looking at alternatives that best serve the modern economy,” revitalising discussion on what alternative would best suit New Zealand, however this talk has gone on too long and the time has come for decisions.

The NZMEA has been vocal in its criticism of the current approach, which uses interest rates dictated by the Reserve Bank’s Official Cash Rate to curb demand and influence inflation. The policy has had a big impact on exporters, particularly in recent years, with exports dropping from 33% of New Zealand’s GDP in 2001 to 22% in 2007.

NZMEA Chief Executive John Walley says, “There has been a lot of talk from politicians on this issue, including a drawn out Select Committee on monetary policy, but we stress the need for urgency to reset policy in this area. High interest rates available to international speculative capital have driven exchange rates up, devastating returns to exporters, and driving activity and jobs offshore. If we go into the next cycle with the same policy settings we will lose out again, and more importantly, investment in new products and services will be seen as risky and less activity will result. ”

The NZMEA has advocated a savings based approach to controlling inflation in ‘A case for compulsory superannuation’ whereby the savings rate is adjusted according to inflationary pressures. This would stop inflation from driving the dollar up and provide a large fund for investment in New Zealand business.

“What we are seeing at the moment is increasing fuel and commodity prices driving inflation, which in turn is holding up interest rates and exchange rates. These forces are unlikely to stop any time soon so we need to break the link between inflation and the exchange rate,” says Mr. Walley.

“The Government needs to support the tradeable sector with its monetary policy.”

ENDS

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