Stay off the brakes

Stay off the brakes

The Reserve Bank must avoid doing further damage to the economic recovery with another premature Official Cash Rate (OCR) hike say the New Zealand Manufacturers and Exporters Association (NZMEA). Below forecast Cost Price Inflation (CPI) and lower than expected economic growth simply do not warrant another interest rate rise at this point.

The Reserve Bank based last month’s decision on a reading of economic conditions that has been shown to be optimistic. Demand, commodity prices and employment point to, at best, a weak and unbalanced recovery. The NZIER’s Survey of Business Conditions suggests that confidence has turned back around and our own survey reported a small expansion in jobs and confidence on 2009, but nothing to indicate a strong recovery. Currency and commodity price volatility, lower growth than expected, weak house sales and supermarket spending slipping for the first time ever in May; all these factors point to an unstable recovery.

NZMEA Chief Executive John Walley says, “None of these indicators highlight an inflation problem. A dip back into recession in Europe or stagnation in China could see commodity prices fall further and very quickly. The risks posed today by these potential shocks far outweigh any potential inflationary pressures a year or so down the track.”

“The latest CPI statistics show that non-tradeable inflation is again driving the CPI numbers while tradeable inflation was negative. Increasing the OCR has little impact on non-tradeable inflation so it is unlikely to fix the problem,” says Mr Walley. “Further efforts by the RBNZ on prudential supervision to restrict banks access to offshore funds, rather than another damaging cycle of rate hikes and currency appreciation, would better target domestic inflation pressures.”

“Generally the upwards pressure on the New Zealand dollar since the last OCR announcement damages our economic recovery and any economic rebalancing.”

“We have said for some time that September should have been the earliest point to consider any moves on the OCR. At this point even September seems too early.”

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