The Mapp Report
www.waynemapp.co.nz

It's Time for An Economic Boost,Not An Economic Boot

Yesterday's Reserve Bank announcement to increase the Official Cash Rate to 8.0% will worry all homeowners with mortgages and businesses requiring credit. New Zealand has the highest interest rates in the developed world and it surely affects our economic prospects. In contrast, the official rate in Australia is 6.25%.

New Zealand's interest rates have been higher than Australian rates virtually all my life. The usual reasons put forward for New Zealand's high interest rates are the small size of our economy, the high levels of total indebtedness, the volatility of the economy and the narrow export base.

The Governor of the Reserve Bank has one mission; to keep down inflation. Low inflation provides certainty in the economy and ensures that inefficiencies are transparent. Inflation has increased in recent times as a result of buoyant consumer demand, a tight labour market, international fuel prices and a buoyant property market. The Governor has added a further reason; the high level of government expenditure.

Experience tells us that increased interest rates will also drive our currency up, as international investors purchase more New Zealand bonds. So far, the increase in the currency has not affected exports too seriously. Global demand and increased export prices have mitigated the impact for many exporters, but at some point a rapidly appreciating currency will cause real harm.

New Zealand's attachment to our sovereign currency clearly has real costs. We have much higher interest rates than our neighbour, Australia. We have greater currency volatility. We also incur significant currency transaction costs, and the added cost of running the Reserve Bank.

It is not surprising that John Key raised the question of whether New Zealand should, in essence, adopt the Australian currency at the Australia-New Zealand Leadership Forum in May.

If New Zealand took this step we could expect seats on the Board of the Reserve Bank of Australia, which could be renamed the Reserve Bank of Australia and New Zealand. We should be able to have our own distinct notes and coins, as is the case with the distinctive Royal Bank of Scotland notes for the British currency. Naturally, they would need to be the same size as the Australian currency in order to be interchangeable.

Some will lament the loss of our unique currency, and will argue that we will be tied to a currency in an economy that follows different cycles to the New Zealand currency. In fact, the two economies are quite closely in sync, and the two currencies normally rise and fall together, even if the New Zealand currency is a little more volatile than Australia's.

Imagine interest rates being 2% lower than at present, and in fact 2% lower than New Zealand interest rates at any stage over the last two decades. That would be a permanent boost to our economy. It may even help arrest New Zealand's continuing brain drain to Australia, which is now at 700 people per week.

The loss of sovereignty exists simply in our imagination. Are the French any less French by adopting the Euro?

It's time to have a serious discussion on the future of our currency.

8 June 2007

Events

Thursday 21 June

6.30pm to 8.00pm

JONMER Business Centre Boardroom

Level 4 ,

95 Hurstmere Rd, Takapuna

$25 per person, includes refreshments and hors d'oeuvres

Speaker: Gerry Brownlee, Shadow Leader of the House of Representatives

RSVP: Monday 18 June to 486 0005

Thursday 28 June

7.30pm

PUBLIC MEETING

Takapuna Grammar School

Lake Rd, Takapuna

Topic: Education in New Zealand - How do we improve it?

Speaker: Katherine Rich MP, National Party Spokesperson for Education

Dr Wayne Mapp

For more information on National visit www.national.org.nz

To join the conversation with John Key visit www.johnkey.co.nz

Visit my website for more information at: www.waynemapp.co.nz

ENDS