OCR risks ‘irrelevancy’ as Government spending caned

26 October 2009

OCR risks ‘irrelevancy’ as Government spending caned

Ahead of Thursday’s official cash rate (OCR) decision, Federated Farmers is restating the need to cut the OCR by 50 basis points to prevent a ‘W’ shaped recession. The Federation is also warning the Government that its fiscal policy settings are undermining monetary policy and putting at risk the OCR as a policy tool.

“The Government’s spending and debt growth is delaying a necessary rebalancing of the economy. This makes it extremely hard for the Reserve Bank to do its job of implementing monetary policy,” says Philip York, Federated Farmers economics and commerce spokesperson.

“Of primary concern is the effect of these policies on the dollar. Federated Farmers fair value for the Kiwi dollar is in the US60 to 65 cent range but in trying to insulate the domestic economy, the Government could be restarting a credit fuelled bubble.

“Government borrowing is running at some $250 million every week or more than a billion dollars a month.

“This domestic stimulation along with ‘good news stories’ are stoking the Kiwi dollar ever higher. New Zealand is sucking in Euros, Yen and whatever currency investors choose to park in order to get some of the best yields in the OECD.

“Anyone with exposure to the international economy is being crucified by the high dollar. The need for action is not just about farmers’ interests but serving the interests of all exporters and tourism operators alike.

“We’re the ones who pay New Zealand’s way in the world after all yet all we hear from Government is self-congratulatory statements over how we are now in recovery.

“The issue for exporters is that demand for debt, whether led by the private sector or by Government, is undermining monetary policy and risks making the OCR irrelevant.

“A number of farmers got caught up in this debt exuberance. But a majority are now focussing on retiring debt while increasing productivity. The key word for all exporters is productivity but to date, Government’s fiscal policy is harming, rather than encouraging, exporters.

“If the Government believes its own rhetoric of an export led recovery then some hard decisions are needed immediately. The first order of business is to wind-back these so-called stimulus policies, given the recession has apparently ended.

“Turning off billions in spending and debt may start abating demand for the Kiwi dollar. Tactically, a cut to the OCR on Thursday may open up clear air between the New Zealand and Australian economies. We need to decouple the Kiwi from the Aussie dollar.

“Since 10 September, doing nothing has only seen the Kiwi smash through the US70 cent barrier to threaten US80 cents. The choice is either a short dose of reality now or the abyss when the economy inevitably crashes into a ‘W’ shaped recession,” Mr York concluded.