Brash Urges "Cool Heads And Rational Thinking"

Brash Urges "Cool Heads And Rational Thinking" On Currency Fall

5 October 2000

Reserve Bank Governor Don Brash today called for people not to overreact to, or be simplistic about, the recent marked fall in the exchange rate.

In a speech in Auckland to the American Chamber of Commerce in New Zealand, Dr Brash today said: "There is no single, simple, explanation for the fall in the value of the New Zealand dollar over the last two or three years. ...Exaggerated claims that the fall can be pinned on just one thing - whatever that one thing might be - are almost certainly wrong, and are unhelpful in improving our understanding of the implications. At this time, we need cool heads and rational thinking, not extravagant claims or counter-claims."

Dr Brash began his address by summarising a range of factors that could have contributed to the recent sharp fall in the New Zealand dollar. He then reviewed the likely effects, saying these depended on whether the primary influence was the rise in the US dollar, suggesting a reversal was possible fairly soon; or whether New Zealand-specific factors were predominant, in which case the effects were likely to be more enduring, he said.

Dr Brash said the lower dollar was "encouraging the production of goods and services which will reduce our balance of payments deficit". However, he also warned that this would only occur if those in the domestic economy showed restraint in setting "prices, fees, wages and salaries". Otherwise, he said, the Reserve Bank would have to increase interest rates to contain increased inflationary pressures and that would cause a "temporary increase in unemployment and a loss of output."

"Sound policies across the whole breadth of the economy are the best way of ensuring that the exchange rate recovers over the medium term, and of course the best way of ensuring prosperity for all New Zealanders as well. A prosperous New Zealand, with low inflation, will enjoy a strong currency over the long term, and productivity growth to justify that strength," Dr Brash concluded.

For further information contact
Paul Jackman
Corporate Affairs Manager
Ph 04 471 3671, 021 497 418, home 04 938 8177, Jackmanp@rbnz.govt.nz

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