RBNZ holds OCR, challenges remain - 29 October

RBNZ holds OCR, challenges remain - 29 October

The Reserve Bank of New Zealand (RBNZ) chose to hold the OCR at 2.75% today, though signalling further reductions may be required to reach their inflation target. Economic risks remain, and continued work from Government and business is needed to rebalance our economy towards high value-added, diverse exports, say the New Zealand Manufacturers and Exporters Association (NZMEA).

NZMEA Chief Executive Dieter Adam says, “Another cut in the OCR could have helped better align our interest rates with the rest of the world and help move our exchange rate back down its correcting path. Unfortunately we have seen our exchange rate move in the wrong direction recently, as described by the RBNZ “the exchange rate has been moving higher since September, which could, if sustained, dampen tradables sector activity and medium term inflation. This would require a lower interest rate path than would otherwise be the case”.

“It remains important that our currency continues on its rebalancing trend, helping exporters to regain ground in markets after the extended period of an unsustainable exchange rate.

“This week’s merchandise trade deficit came in larger than expected, due to increased imports and lower export values, largely fuelled by the fall in dairy prices and volumes. However, it was encouraging to see mechanical machinery and equipment continue recent positive trends in export values; improving 3.6% on last quarter, and increasing 6.6% on the same quarter last year.

“As a country we need to continue to rebalance our economy away from investment in unproductive assets and towards a more diverse, value-added export economy that allows us to pay our way in the world and improve all New Zealanders quality of life. This requires both helping commodity producers move up the value chain, as well as encouraging and supporting higher-value, highly-skilled manufacturing and exporting businesses that build our future prosperity.

“Recent dairy price movements and weather events outline the inherent risks and limitations of competing in large commodity markets – relying on commodity exports and a house price boom cannot be our primary economic growth strategy.

“Dealing with our housing issue is a separate, but important part of this – it currently poses a threat to financial stability, while pulling vital investment away from our productive businesses. It is also limiting the options of the RBNZ – further OCR cuts could add fuel to the fire without other measures to deal with both demand and supply sides of housing.

“As well as the trade surplus, our balance of payments and current account are vital measures of the health of our economy, focusing on our overall position, including trade and external debt. Unfortunately our current account deficit is going in the wrong direction and expanding. The Government's ambitious target of exports reaching 40% of GDP by 2025 would help dramatically change and re-balance our economy, but we have not yet seen any signs of the country moving in that direction and more support and forward looking strategy will be needed to achieve this target.” said Dieter.

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