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MAY 14

The high politics of a high currency - Bernard Hickey

There has been a lot happening in the policy space recently and some of the conflicting and conflicted interests coupled with short and long term trade offs are being surfaced. Bernard Hickey nails it with the following article, which appeared in Hive News, click here for original article.


The high politics of a high currency

Prime Minister John Key was put in a slightly uncomfortable position this week, and it wasn't just over Maurice Williamson's resignation.

Labour's monetary policy announcement put the Government into the awkward position of having to argue in favour of higher interest rates and a high New Zealand dollar

David Parker's idea of increasing the savings rate in a universal KiwiSaver scheme to take pressure off interest rates and the New Zealand dollar certainly backed the Prime Minister and Finance Minister Bill English into a corner.

The Government's immediate reaction was to oppose such an idea, but that opposition only served to expose and reinforce the political calculations behind our currency and interest rates. It also meant the Government had to argue against an expansion of a popular savings scheme that it has supported, albeit reluctantly.

Key called Labour's Variable Savings Rate of an Australian-style compulsory KiwiSaver scheme "wacky" and compared it to "pixie dust," but when asked about the prospects for lower interest rates and a lower New Zealand dollar, he explained his conflicted view.

"You've just got to be careful what you wish for because a substantial reduction in the exchange rate would certainly see a lot of consumer goods that consumers in New Zealand buy go up in price," Key was quoted as saying.

This certainly contrasted with the Government and the Reserve Bank's drumbeat of comments in recent months about how the currency was over-valued and unsustainable. Mr English has been saying since last year he expected the currency to come down and has admitted the Government's long-term target of lifting exports from 30% to 40% of GDP by 2025 would be difficult with an over-valued currency.

That over-valuation has become even more acute since February because dairy commodity prices have fallen 20% since then, but the currency has remained stubbornly over 85 USc.

So which is it? Does the Government want a lower currency to encourage exporters to create more jobs in a productive economy that drags New Zealand back towards a current account surplus?

Or does it want a stronger currency to increase the purchasing power of stressed consumers who have had to cope with low nominal wages growth and rising domestic costs of electricity, housing, insurance and rates over the last five years?

This is where the political rubber hits the economic road.

The Government can talk all it likes about the economic necessity of a more fairly valued currency that helps exporters in general and farmers in particular, but there are far more consumers and workers than there are farmers and exporters.

The short term interests of the many will trump the short term interests of the few every time, even if a lower currency is in the long term interests of the many and the few.

The Government's reaction exposed this uncomfortable truth. New Zealanders love cheap imports and overseas holidays, and the cheaper the better. That pressure becomes acute as the economy picks up and employment starts growing. As wages and costs for locally made goods and services rise, consumers and businesses naturally look for cheaper alternatives overseas. Anything that threatens that escape valve is unwelcome.

English's brief comments about how term depositers would be losers if interest rates fell under Labour's plan also exposed the Government's discomfort. But it also exposed a somewhat surprising truth for often-indebted headline writers and journalists -- some people love high interest rates.

There are now many more term depositers and many, many more term deposits than there were the last time interest rates were rising in the months before a Government was trying to win a third term. Back in mid-2005, household term deposits totalled NZ$57 billion. They were worth NZ$127 billion in March this year.

Former Reserve Bank Governor Alan Bollard used to say only partly in jest that he received more letters of complaint when he cut interest rates than when he raised them.

It may be depressing for business leaders and those with a long term view, but politicians and voters respond to incentives and those short term incentives are currently in favour of high interest rates and a high New Zealand dollar.

tags: currency, hive news, bernard hickey, exchange rate, manufacturing, labour, variable savings rate
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