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High exchange rate stopping economic rebalancing

23 April 2012

High exchange rate stopping economic rebalancing

The high kiwi dollar is preventing the long overdue rebalancing of our economy onto a more productive and less debt-ridden footing, the Green Party said today.

Reserve Bank Board Minutes obtained under the Official Information Act show that as far back as June 2009, Reserve Bank Governor, Dr Alan Bollard was uncomfortable with the stronger currency telling the Board that “it would not deliver rebalancing”. On that day, the kiwi dollar was worth US$0.63 while the Trade Weighted Index (TWI) was at 60. Since then, the kiwi dollar has appreciated 28 percent against the US dollar to US$0.81 while the TWI is up 21 percent to 72.6.

“These previously unseen Board Minutes show that the Reserve Bank Governor told the Board that his number one message way back in 2009 was the damage the high kiwi dollar was inflicting on the economy,” Green Party Co-leader Dr Norman said.

“Three years later, and the kiwi dollar has risen even further and still no action has been taken.

“The New Zealand economy has been unbalanced for years. It has had large current account deficits and, in order to pay for those deficits, it has built up high levels of external debt and overseas ownership of the economy.

“The only way out of this downward spiral is to rebalance the economy towards the tradeable sector so that it can perform much better, but that needs a lower exchange rate.

“If we want our export and import-competing sectors to thrive and pay our way in the world, we are going to need to address our high and highly volatile exchange rate.”

As the Green Party revealed last week, the Business Operations Survey provided strong evidence that the high and volatile exchange rate is hurting our export industry with close to half of all New Zealand export companies saying it is the most important factor constraining their exports.

“The National Government has been asleep at the wheel ignoring the key structural vulnerabilities our economy is facing,” said Dr Norman.

“We need to have a national discussion on measures that can stabilise our exchange rate at levels our export industry can thrive in. Overseas Governments have been taking this issue very seriously.

“There are small practical steps we can take immediately that will help.

“We can reduce the pressure on the exchange rate and the tradeable sector by empowering the Reserve Bank with a mandate beyond inflation control to include managing exchange rate levels and volatility.

“Instituting a tax on capital gains (excluding the family home) would also ease upward pressure on the exchange rate.

“The Government can set in place the drivers and incentives for our companies to export, innovate, and thrive.”

The Green Party's alternative plan for our economy:

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