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The cycle continues

Canterbury Manufacturers’ Association (CMA) Media Release
18 July 2007.

The cycle continues.

The Canterbury Manufacturers’ Association (CMA) says that it expects the New Zealand dollar to continue its upward trend towards the USD.80 threshold, irrespective of whether the RBNZ raises the OCR next week.

“The Government’s response to the current economic cycle is a case of ‘Nero fiddled while Rome burns’”, says Chief Executive John Walley.

“The NZD has climbed from around USD.62 to nearly USD0.80 in a year, but the Government continues to use the Reserve Bank Act as a pretext to sidestep having to adjust policy settings to reduce domestic inflationary pressure. If the Government lacks the necessary leadership, then perhaps the Select Committee will agree with what needs to be done to break the cycle”.

“How much worse do things have to get before we really start to look for a better way? The export sector is in sharp decline and our economy is increasingly vulnerable to possible shocks, such as sharp falls on international financial markets, a second Asian Crisis, or even just a shift in sentiment regarding our currency. All of these are beyond our control”, says Mr. Walley.

“High prices for dairy commodities and a slightly better NZD/AUSD cross rate are providing some comfort for New Zealand’s balance sheets at present. However, domestic spending and house prices show no sign of slowing down, so we can expect the NZD remaining strong against the USD and the Yen, even if the RBNZ holds the OCR next week”, says Mr. Walley.

“The comment from Dr Cullen that “This country has got to shift its behaviour over time away from consumption-led growth to savings and investment-led growth” is 100% correct - but the rules will have to change before the behaviour changes”.

“At the moment the RBNZ cannot fix the problem without killing the external sector. The Government must show leadership, change the rules, and act to break the cycle of house price inflation - pushing consumption, pushing inflation, pushing the OCR, pushing international money back into inflated house prices - round and round, to the point the rest of the economy feels the pain currently felt by our exporters”.


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