Low inflation gives scope to cut OCR, help exporters

Today's record low inflation figure of 0.8 percent, below the Reserve Bank's target band, gives the Bank scope to cut the Official Cash Rate later this month, the Green Party said.

A lower Official Cash Rate (OCR) is likely to lead to lower domestic interest rates which, in turn, will take pressure off our overvalued exchange rate, helping exporters and manufacturers who compete with imports.

"Low inflation gives the Reserve Bank generous scope to cut the OCR as a first step to addressing our overvalued currency," said Green Party Co-leader Dr Russel Norman.

"The overvalued New Zealand dollar is hurting exporters and manufacturers who compete with imports - one of the main drivers of massive job losses in this sector and contributing to our worsening current account deficit.

"Unfortunately, the Reserve Bank's historic focus on maintaining price stability at the expense of the economy has meant monetary policy has been in conflict with addressing more pressing issues like economic rebalancing, the unsustainable current account deficit, and high unemployment.

"A broader mandate for the Reserve Bank is well overdue and the Bank will need more tools to manage price bubbles during a period of low interest rates."

The IMF's latest World Economic Outlook report (WEO) provides evidence that the New Zealand economy would prosper if it adopted a more flexible approach to monetary policy protecting jobs and rebalancing the economy. The report notes 'declining inflation rates, growing slack, and sizable fiscal adjustment in the advanced economies argue for maintaining very accommodative monetary conditions, including unconventional measures'.

"Most of our trading partners are using tools that lower their currencies to rebalance their economies towards exports and job creation," Dr Norman said.

"The National Government promised to rebalance the economy, but their high dollar strategy is slowly bankrupting the country and costing New Zealanders good jobs.

"National has defended its do-nothing approach to the high New Zealand dollar on the basis of the risk of inflation, but today's inflation figure reinforces what the IMF has already said: Inflation is not the risk facing the world, or New Zealand.

"While the rest of the world adopts modern monetary policy, the National Government is doing nothing. That's costing thousands of manufacturing jobs and leaving New Zealand deeper in debt."

The Green Party have proposed a suite of measures to put downward pressure on the New Zealand dollar that includes lowering the OCR, introducing new tools to stop housing bubbles, introducing a comprehensive capital gains tax (exempting the family home), and a programme of targeted quantitative easing to rebuild the currently empty Natural Disaster Fund.

The Green Party proposal for lowering the high Kiwi dollar:
http://www.greens.org.nz/press-releases/greens-offer-suite-measures-address-high-kiwi-dollar

World Economic Outlook, October 2012, IMF:
http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf