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RBNZ right to hold OCR - 11 September

RBNZ right to hold OCR - 11 September

The Reserve Bank of New Zealand (RBNZ) announced today the OCR would remain unchanged at 3.5%. This will be welcomed by manufacturers and exporters, as an increase at this point would add further upwards pressure to our persistently overvalued currency, say the New Zealand Manufacturers and Exporters Association (NZMEA).

NZMEA Chief Executive John Walley says, “This pause in OCR increases is good news from the RBNZ, however they should commit to holding rates for as long as they can to take pressure off the already overvalued dollar, particularly while inflation pressures are remaining relatively low, excluding housing, and economic growth prospects are being talked down as falling dairy and log prices are not compensated by a falling currency - a failure of the so called autostabliser.”

“The RBNZ again expressed concern for the currency, saying the current level remains “unjustified and unsustainable”, while noting the failure of the exchange rate to respond to lower commodity prices. In current settings this will remain a significant issue into the future, and we need to see a more active policy effort to correct this.”

“Housing and land speculation remains a major issue in New Zealand, and insufficient policy focus on the productive economy threatens the entire economy including the non-traded sector. A key driver in asset speculation is the tax advantage delivered by the absence of any Capital Gains Tax (CGT). This is a distortion that needs to be addressed. Unfortunately, although there has been discussion on the topic, the misinformation and errors have rushed in pushing out any discussion on the important principles behind the CGT.”

“One example of this was the recent NZIER report, which expressed that the tax has merit in principle, but claimed it would not be effective in practice while being too complicated to implement. We have since seen some rebuttal from David Parker on these points, but there is no doubt that a CGT would help cool asset markets, take pressure off the RBNZ, interest rates and currency, and incentivise productive investment in comparison to asset speculation. There is no tax principle that supports distortionary tax holes, and the absence of CGT is a distortion that means other sources of tax: income, corporate, fringe benefit, excise and GST must carry a disproportionate tax load - this needs to be corrected.”

“The introduction of any new tax policy is always ‘difficult’. Remember how we felt about GST? This is not really a good enough reason to dismiss it given the sound principle behind it – we have the benefit of being able to learn from the extensive experience around the world and public comment on implementing a CGT.”


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