Business group urges inflation rethink

Last updated 05:00 10/12/2012

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A move by the Reserve Bank to try to keep the inflation rate near 2 per cent, rather than generally within a 1-3 per cent inflation band, could result in volatile inflationary conditions, a manufacturing group says.

NZ Manufacturers and Exporters Association chief executive John Walley said times remained difficult for manufacturers, battling a persistently high New Zealand dollar. The dollar was supported by the central bank's official cash rate that should be further cut to 2.25 per cent, he said.

The New Zealand dollar climbed more than 1 per cent against the US currency on the release of the Reserve Bank's December Monetary Policy Statement last week, he said.

The kiwi is generally driven up if New Zealand's interest rates are relatively high compared to other countries around the world, as international investors chasing returns here buy the currency.

When the Reserve Bank on Thursday left the official cash rate at a low point of 2.5 per cent, the kiwi initially rose from about US82.5c to about US82.9c. By Friday afternoon it had climbed further to US83.3c, which was an ongoing concern, Walley said.

The NZMEA wants the Government and Reserve Bank to introduce policies and settings that discourage a high New Zealand dollar.

Walley said the new Reserve Bank governor Graeme Wheeler would not help matters by trying to keep the inflation rate close to the centre of the inflation rate target.

"We think that's going to turn out a problem, because if you've got a band you should use it," Walley said.

"Try to always keep it in the middle is just asking for over corrections."

Walley said the latest survey showed that manufacturers and exporters were selling more but "feeling worse . . . and the continuing rise of the currency isn't going to help".

The association's latest survey of business conditions shows total sales for October were up 7.05 per cent on November 2010, with exports up 1.9 per cent; and domestic sales up 11 per cent.

The survey sample covered $594 million in annualised sales, with an export content of 42 per cent.

Net confidence rose to minus-18, up from minus-33 for September.

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