The Consumers Price Index (CPI) has dropped 0.3% in the December quarter and inflation increased by 1.8% year on year, well within the target band. That allows plenty of room for monetary policy that supports exports say the New Zealand Manufacturers and Exporters Association (NZMEA).

NZMEA Chief Executive John Walley says, “With problems continuing in Europe and a weak domestic economy, inflation pressure is likely to remain low for a prolonged period. That means every effort should be made to bring down the exchange rate to support the export sector. That means an Official Cash Rate cut next week and more policy changes over time.”

“The RBNZ has persistently overestimated inflation pressure in the economy; we have been calling for further cuts for some time, now is the time to act.”

“Using the exchange rate to defuse headline inflation caused by the domestic economy is a failed strategy. It is the primary reason for growth in the export sector stalling from 2004 until now. This practice will have to stop at some point if our economy is to rebalance.”

”It is worth noting that tradable inflation went down 0.9% in the December quarter.”

A better strategy for the Reserve Bank would be to:

• Target non-tradeable inflation;

• Use Loan to Value Ratios to control credit volumes; and

• Specify the amount of savings (deposits) banks are required to raise in New Zealand to limit offshore exposure.

“Had this been done 10 years ago debt levels and servicing costs would have been lower even if average interest rates had been higher. Overall the New Zealand economy would now be better balanced with higher wages, more jobs, more savings and better housing affordability,” says Mr Walley.

“With headline inflation dropping there is no reason to hold up interest and exchange rates artificially. We must see a cut from the Reserve Bank next week, and policy changes must be introduced over time to target inflation in the non-traded sector.”