The decision to hold the OCR at 3% – in line with market expectations – reflected Reserve Bank governor Alan Bollard’s recognition that the economic recovery has been flagging.
Bollard told Parliament’s Finance and Expenditure Committee last week he had seen scant impact on prices from the increase in GST to 15% from 1 October. Consumer spending and housing market activity are sluggish but the Reserve Bank’s outlook is brightened by continued high export prices, along with reconstruction and repairs in Canterbury.
Trouble is, the strength of the exchange rate is eroding the NZ dollar value of export returns, with the Kiwi nudging back towards US$0.75 immediately after the release of yesterday’s Reserve Bank announcement.
Exporters’ disquiet with the exchange rate is evident in the National Bank’s latest Business Outlook. Business confidence picked up in October, the first improvement in five months, and net 31 percent of respondents expect better times for their own businesses over the year ahead, up four points from September.
However, export intentions dipped 12 points: net 20 percent expect to be exporting more over the year ahead, down from net 32 percent last month. “After months of shrugging off the steady rise in the NZ dollar exchange rate, the breach of 75 cents against the US dollar appears to have been tipping point,” the National Bank said.
So what is the Government doing for those exporters? That question was posed by the Productive Economy Council (PEC) in its analysis of the Government’s anxiety to appease Warner Brothers and ensure the Hobbit movies are produced in this country. It argued that Warner Bros’ concerns were more to do with the exchange rate than union issues.
The two parts of the Hobbit were each budgeted at US$250 million, PEC analyst Selwyn Pellett pointed out. But the fluctuations in our exchange rate meant the budget cost over the last two years to make the movie here had varied by 50 percent.
With our no-intervention policy and the US printing money (as part of quantitative easing of its monetary policy) the producers knew it was likely to go higher still, costing them more money.
“It’s that potential variation in cost that is the real issue here,” according to Pellett. “So Warners are trying to mitigate the risk of that by offloading responsibility for the exchange rate risk to the Government – by seeking additional tax breaks and so would I if I could.”
But Pellett pointed out New Zealand was losing this amount of work from exporters every day while the exchange rate sits at US$0.75 compared to – say – US$0.65. Yet they did not get emergency meetings with the Government and talk of changes to legislation and compensation.
The Hobbit will stay in New Zealand in return for taxpayer sweetener of up to US$15 million and rewrites to crucial element of employment law. If the PM will do that for $500 million deal, what will he do for the rest of our exports?
