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SEP 12

Inevitable job losses stem from currency

Solid Energy’s announcement of job losses is no surprise with the NZ Dollar staying overvalued despite falling commodity prices. This comes after reductions in milk payout forecasts from Westland Milk and Fonterra due to the same impact of an overvalued dollar combined with lower milk prices.

Solid Energy’s Chairman John Palmer outlined their problems:
“Solid Energy’s financial situation for the next period will continue to be challenging and is worse than during the 2008 global financial crisis. In 2008-09 when US dollar export coal prices collapsed, the New Zealand dollar followed. Coal prices rebounded relatively quickly in the following year, whereas this time, with a high New Zealand dollar, we expect prices to be weak for a prolonged period.”

The Government seems intent on looking for a saviour for the export economy but is finding that the exchange rate impacts export firms across the spectrum. Minister Joyce’s latest offering that increased mineral exploration and mining will generate the much needed export growth doesn’t look so promising in this context.

Improving conditions for all exporters is the way out – and that means dealing with the exchange rate.

A Reserve Bank Amendment Bill has been introduced by Winston Peters and needs to be taken seriously. A debate on this through the parliamentary select committee process would be a good start – it needs to pass a first vote before this can happen.

Across the political spectrum we have agreement that the New Zealand Dollar is too high and volatile. Supporting this Bill through to the select committee stage will create open debate on the issue and perhaps some action will follow. The world is a different place today than it was in 2007 when monetary policy was last reviewed.

This is the proposed wording:
“The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of maintaining stability in the general level of prices while maintaining an exchange rate that is conducive to real export growth and job creation.”

The changes to the Reserve Bank Act need to be debated - what are the targets, what are the mechanisms, how will the decisions be made, who will make those decisions - how will the Reserve Bank board be constituted. All political parties should support the Bill through to a select committee phase and front up to the arguments. What we have at the moment is not working.

A number of central banks around the world have taken action to prevent the overvaluation of their currency so there is now plenty of international evidence to call on. The United States Federal Reserve has just announced it is likely to have another round of quantitative easing, Canada has introduced loan to value ratios to prevent demand for household debt from pushing up their currency and Switzerland has been intervening for over a year to lower the value of their currency.

Alan Bollard discussed the possibility of getting the World Trade Organisation to police currency manipulation to prevent the kick on effects from hitting countries like New Zealand. We cannot simply wait for a pie in the sky scheme – we must take action, like the other countries, to ensure our exporters are competitive.

Lowering the exchange rate is the precursor to balancing the economy through export growth. Openly exploring options on how to achieve is a start.

tags: currency, solid energy, reserve bank amendment bill
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