Grasp the OCR nettle or face more restructuring.

The Canterbury Manufacturers’ Association (CMA) says the Reserve Bank needs to send a strong and clear message that it is willing use the OCR to tackle domestic inflation, sooner than later, or see more businesses, such as Skellerup, restructuring around the problem.

“A continued tentative response by the RBNZ prolongs the problems for many companies, from traditional sawmills to the high-tech, niche exporters that the Government proposes as the future of our economic growth” says Chief Executive John Walley.

“The RBNZ had an opportunity to lift the OCR in late 2005 when conditions warranted such action, but it timidly held rates instead of quickly and meaningfully raising them. As a result, exporters continue to suffer chronic pain almost two years later. In the absence of independent thinking or any visible monetary and fiscal coherence, we still seem to need some acute pain or suffer the fate of the boiled frog. Instead of waving the big stick and observing little restraint from Government or the consumer, New Zealand needs a dose of the only medicine available - but grasp the nettle and do it”.

The CMA accepts that a forceful approach from the RBNZ would mean more pain for the tradable sector, but the longer the dollar remains at this level more and more of our companies will take a strategic view and restructure their business models out of New Zealand in order to protect profitability.

“Skellerup is the latest company to announce restructuring and has cited the ongoing strength of the dollar as a foremost reason behind its decision, and we can expect more to follow because we do not expect to see a drop in the OCR this year. When companies such as Skellerup take such decisions, New Zealand loses more of its tradable base to what are essentially transient conditions, and in so doing we erode the capability to respond to future opportunities”, says Mr. Walley.

“It can take a long time for a company to build capability and make decisions on whether to move into or out of a market. We have entered a stage in the current cycle where businesses are forced to move jobs and skills offshore. Sooner or later, the problems of inflation and exchange rates will be corrected in New Zealand, but the lost activity is unlikely to return”.

“Therefore, the message from manufacturers and exporters to the RBNZ is “grasp the nettle” – properly and robustly use the OCR to really tackle domestic inflation. Yes, a rise in the OCR will push interest and exchange rates, but pushing through a short period of acute pain is preferable to the attrition of another 1000 days of an overvalued currency “

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