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Interest Rates To Rise - Manufacturers Federation

Media Release

Interest rates sure to rise
10 February 2000

Interest rates are almost certain to go up early next month says the Employers & Manufacturers Association.

“The Reserve Bank will stay true to form and raise interest rates early next month,” said the chief executive of EMA (Northern), Alasdair Thompson.

“The Bank will do this mainly to lift the exchange rate and stop the pass through into the economy of higher raw material costs which could eventuate in many months time if our dollar was allowed to get weaker, not because of any sign of imminent inflation.

“The increase will represent at least an extra 0.5 per cent onto interest rate costs.

“With this prospect, business should consider locking in some of their borrowings at fixed rates now.

“Unfortunately the move will see some investment plans shelved, with new production capacity and new job opportunities diminished.

“However, it is far less likely to have the desired result of shoring up the exchange rate. In the face of our current account deficit reaching 8% of GDP, the value of our dollar could easily remain low, and less responsive to interest rate changes,

“The Reserve Bank needs to be mindful that our import economy is all too successful and our export economy not successful enough.

“More ominously New Zealand’s household debt is reaching levels that are making the country uninviting to new offshore investors. Our net foreign debt is now 87% of GDP, or $86 billion, the vast bulk of which has been mortgaged against New Zealand homes in the last three years.

“Given our high net foreign debt and substantial trade deficit, it is imperative that the Reserve Bank does not try hoisting the exchange rate against the need to promote exports nor out of an unfounded concern over the inflationary effect of a lower currency.

"Despite the five major trading banks all forecasting our exchange rate to rise in March to a minimum of 52 cents to the US$, we know no exporter that agrees with their forecast. In spite of production capacity constraints, new investment for expansion remains very low and it is showing few signs of picking up velocity as the favourable dollar and relatively low interest rates signal it should.

“Against this backdrop, the interest rate rise next month has potential to either lead the economy into deflation or strip value from house owners assets.”


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