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“Exchange rate adds to uncertainty”, says BERL

“Exchange rate adds to uncertainty”, say BERL forecasters

In their latest assessment of prospects for the New Zealand economy, BERL express growing concern at the level of the Kiwi dollar and its impact on exporters and so therefore on growth.

“We would have preferred to retain our focus on the labour market and the remarkable employment expansion recorded by New Zealand over the past three to four years” said BERL director Kel Sanderson. “But, we are now forced to return to an issue that we have had to highlight on numerous occasions over the late-1980s and 1990s. Bluntly, again, the question is : employment and growth - will we choke again?” he said.

The economists point to the longer-term pattern. When the TWI has been 60 and above employment has been either flat or declining. It would seem that in these periods the high exchange rate has choked the growth. When the TWI has been somewhere below 56 then there has been good growth.

“A TWI in the mid-60s (or even higher) over the coming three years would be decidedly unhelpful for growth”, commented BERL Forecasts Editor Dr Ganesh Nana. “Unfortunately, the first months of 2003 has continued to see the Kiwi above 90 Australian cents and talk of 60 US cents gather ground, with the TWI now already uncomfortably peering over 60”.

While we do NOT expect the Reserve Bank to allow the TWI to rise into the 66+ range (as it has in the past), we do admit that the TWI is already above our comfort zone. However, we see significant risks on the downside, as the on-going dampening impact from interest rates significantly above global rates and the spectre of a lengthy period of mundane global economic growth weighs on New Zealand. Given the possibility of such a scenario, BERL concludes that they would not at all be surprised if there were OCR reductions in the coming months, as well as later this year.

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