Media Release
9 March 2007

Cullen Must Review Monetary Policy – Wood Processors Association

In the wake of the 0.25% increase in the OCR to 7.5%, the Wood Processors Association is urging the Minister of Finance to review the Reserve Bank’s narrow focus on inflation and fast-track the introduction of additional monetary policy tools currently being examined.

“Alternative methodologies have been proposed which will manage the over inflated housing market and promote savings and we seek robust and consultative evaluation of these by the Reserve Bank” says Wood Processors Association Chairman, Dave Anderson.

“The Reserve Bank desperately needs an overhaul. Its narrow focus on inflation is crippling strategic export industries, particularly the timber industry. High interest rates are attracting massive inflows of foreign capital, which has fuelled the inflation of property values over which the Reserve Bank agonises. Thus, we have the situation where these perverse outcomes are the exact opposite of those the Reserve Bank wants, says Anderson.”

The timber industry is one of New Zealand’s strategic export industries being steadily choked by current monetary policy. The long-term viability of the wood processing sector, which includes sawmillers, panel manufacturers and the pulp and paper sector, is in serious jeopardy thanks to a terminal recipe of painfully high exchange and interest rates. Recent estimates conclude that the industry sector is losing $300m per year due to the high value of the New Zealand dollar which is artificially propped up by current monetary policy.

“Current monetary policy squeezes the timber industry from two sides. First, the Reserve Bank’s determination to perpetually chase its inflationary tail is forcing the exchange rate up to unbearable levels. Second, through having only one tool to influence exchange rates, the OCR, the Reserve Bank is crippling those companies who utilise short-term debt – without any impact on the real drivers of New Zealand’s borrowing habits,” says Anderson.

The exchange rate has sat at approximately 68 cents for the last year which is about 20% higher than the 10 year average with the OCR, at 7.5% being the second highest in the OECD. The increase to 7.5% is the 10th rise in the OCR since January 2004.

Mr Anderson emphasised both the New Zealand and the international economies have changed enormously since the Reserve Bank Act was introduced, almost twenty years ago.

The Reserve Bank Act has for a long time been struggling to deal with today’s incredibly fluid international capital markets. Now, it even seems powerless to meaningfully influence our domestic lending and borrowing behaviour.

“The Act was introduced at a time when inflation was top of mind for policy-makers and politicians. Today’s economy has different challenges and requires a more flexible approach. Of course we need to manage inflation, but not without consideration for the export sector that drives our economy,” says Anderson.

“This week’s drop in the exchange rate has temporarily masked fundamental weaknesses and inflexibilities in New Zealand’s monetary policy. But Dr Cullen needs to take action urgently if we are to avoid closures of processing plants and the long-term erosion of our export sector,” concluded Anderson.

Ends

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