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High exchange rate policy breeding perverse

Wednesday, October 18th, 2006

High interest, high exchange rate policy breeding perverse outcomes

Keeping interest rates high to check energy price hikes from overseas and inflation driven by rapidly rising government costs has to stop, the Employers & Manufacturers Association (Northern) says.

"While our interest rates remain high they will continue to attract money here to take advantage of them," said Alasdair Thompson, EMA's chief executive.

"That's the main reason the Kiwi dollar is way over its long term average of 57c US and causing our exporters' hardship.

"The credibility of our Reserve Bank's high interest, high exchange rate policy is now under huge pressure because of these perverse outcomes being generated for business and the nation's prosperity.

"High interest rates won't stop Kiwis spending while 80 per cent of their mortgages are for fixed terms; all they do is stifle exports and prevent the building of foreign exchange surpluses.

"The quick rise of the Kiwi dollar recently set off by comments by Dr Bollard, showed again our economy is totally exposed to speculators offshore.

"Our exchange rate is therefore no reflection of the performance of our economy though economic theory says it should be.

"However inflation is not out of control; it's at the top of the acceptable level, hence there is no need for more interest rate rises at present.

"Our advice to the Reserve Bank is, be patient, like Australia's Federal Reserve.

"Part of the government's surplus is going into savings, which is also helping contain excessive inflation.

"In the absence of more export receipts we will need substantial productivity increases and/or more people if the economy is to keep growing."

ENDS

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