The Reserve Bank of New Zealand’s (RBNZ) decision to increase the OCR by 25 basis points to 2.75% today is too early, and has the potential to further damage the tradable sector; say the New Zealand Manufacturers and Exporters Association (NZMEA).

NZMEA Chief Executive John Walley says, “Early increases in our OCR puts us further out of line with the rest of the world in terms of monetary policy, which will have the effect of appreciating our already overvalued exchange rate. This is a major concern for exporters and import competing manufacturers.”

“The OCR increase will marginally increase borrowing costs for firms, but for most exporters, the margin lost through the exchange rate is an order of magnitude greater and as such much more damaging.”

“While the RBNZ once again has said they do not believe the current level of our exchange rate is sustainable in the long run, we are yet to see any policy response that does more than shed crocodile tears about the problem.”

“This change, and more generally the absence of a real policy response, will not be welcomed by the traded sector.”

“Inflation is important, but inflation pressures reside in the non-traded economy and interest rates do little to moderate inflation in that sector; reductions in headline inflation rely on deflation in the traded sector. For the traded sector the exchange rate determines what sort of margin gets banked, and margins are thin right now.”

“We saw all this before in the lead up to the global financial crisis, demonstrating the need for better targeted tools for the RBNZ to tackle inflation, without the broad and damaging effects of an overvalued exchange rate on the tradable sector from the OCR carpet bombs.”

“LVR “speed limits” were a step in the right direction, and seem to be having a significant and targeted effect on the housing market.”

“We need more smart, targeted policy, not more carpet bombs.”