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Reserve Bank Caution Required

“The tradable sector has to date borne the brunt of the Reserve Bank’s management of monetary policy, said Simon Carlaw, Chief Executive of the New Zealand Manufacturers Federation.

“Once again, business confidence is weak. The economic recovery is patchy and not firmly established. It could so easily be throttled by a rise in the exchange rate.

“We therefore believe that the Reserve Bank should exercise considerable caution before any move to increase the OCR next month. There is a real potential for interest rate increases to quickly flow through to a higher exchange rate.

“Manufacturers are struggling to compete in either their Australian or New Zealand markets against the recent surge of Asian imports. ASEAN imports here, for example, were up by nearly a third in the year ended June 1999.

“This growth is fuelled by significant Asian currency devaluations. Yet the Reserve Bank’s trade weighted index (TWI) excludes all of the Asian currencies that have devalued. The changes made earlier in the year to the TWI have made the index a better measurement of inflation but much less useful as an indicator of the true value of the New Zealand dollar.

“A new index, drawing on a wider basket of currencies, is required for an accurate indicator of our exchange rate.

“The Reserve Bank should also give due weight to the fact that the very weak domestic market in the September quarter has meant that more manufacturers have had to reduce prices than increase them.

“Increased oil and other raw material input prices may push up December quarter prices for some, but certainly not all, manufacturers. Labour costs have also been stable. Only household borrowing bubbles on.

“Monetary policy alone has proved itself too blunt an instrument to deal with this without complementary fiscal policies that would accelerate the growth of the economy and improve the savings environment. These are the issues that should be the focus of the forthcoming election campaign.

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