Bank urged to hold rates

By Brian Fallow

WELLINGTON - The Manufacturers Federation wants the Reserve Bank to defer a rise in official interest rates until next year, citing the patchy nature of the recovery and fragile business confidence.

While accepting that monetary policy is only one of the influences on the currency, ManFed chief executive Simon Carlaw said a real potential existed for interest rate increases to flow through quickly to a higher exchange rate, which could easily throttle the recovery.

Manufacturers were struggling to compete against a surge of Asian imports in both Australia and New Zealand. Imports from Southeast Asia to New Zealand, for example, were up by nearly a third in the year to June, fuelled by significant currency devaluations.

The Asian currencies that have devalued are excluded from the Reserve Bank's trade-weighted index (TWI). Yet the weakness in the TWI is one of the main reasons the bank is expected to raise interest rates at the next monetary policy statement on November 17.

"We are not trying to be Canute-like," Mr Carlaw said. "We don't expect monetary conditions to stay where they are forever."

But by waiting until March the bank would have a chance to see if the soothsayers were right about an export recovery, the markets would have time to come to terms with the policies of the new Government, and other sources of uncertainty such as Wall Street's turbulence and the Y2K bug would be behind us, he said.

The Institute of Economic Research's quarterly survey of business opinion found that a net 11 per cent of manufacturers expect to raise prices in the next three months.

But price increases achieved have consistently been below expectations.

Mr Carlaw said import competition constrained a solid chunk of manufacturers serving the domestic market from passing on input cost increases.

In the quarterly survey a net 11 per cent of non-exporting manufacturers reduced prices while only a net 1 per cent of exporters reduced theirs.

A net 26 per cent of manufacturers reported an increase in export sales in the September quarter, the highest since December 1994.

But that was heavily weighted in favour of larger firms. A net 42 per cent of manufacturers employing more than 100 staff reported higher exports but only a net 4 per cent of those with fewer than 100 staff.

The superior productivity and output growth of larger firms are also reflected in their profitability, a net 22 per cent of larger manufacturers reporting improved profits, while smaller manufacturers on balance are still reporting declining profitability.