KEY POINTS:
The stellar performance of the New Zealand dollar should theoretically mean cheaper imports, but it does not always turn out that way.
Over the past year, the Kiwi dollar has rallied by more than 13 US cents, or 21 per cent, against the American dollar.
It has also
risen by 25.8 per cent against the Japanese yen, 11 per cent against the euro, 8.4 per cent against the British pound and by 5.85 per cent against the Aussie dollar.
The trade-weighted index, which measures the Kiwi against the currencies of NZ's main trading partners, has gained 15 per cent over the same period.
Thursday's 25 basis point rate hike from the Reserve Bank and plus the prospect of more rate rises to come have driven the currency to a record high against the greenback.
But the currency's appreciation over the year has not translated into cheaper new car prices. Data supplied by the Automobile Association shows that a new manual Toyota Yaris (1.3 litre) costs $19,550, a Honda Jazz $20,500 and a Mazda 6 GLX $38,245 - all the same price as they were a year ago.
AA technical advice manager Jack Biddle said the higher Kiwi has given the distributors greater buying power.
"What we are starting to see is higher specification cars for very little increase, or for hardly any movement at all," he said.
ASB Bank chief economist Nick Tuffley said the currency impact on prices is often very slow and quite subdued. "Movements in the exchange rate don't directly and immediately translate through into shifts at the retail price level, because you do tend to get a little bit of smoothing at various points of the whole importation process," he said.
Exchange rate effects can be absorbed along the way, be it by the offshore supplier, the local importer, wholesalers, or the retailer.
"So there are quite a number of paths along the chain where shifts in the exchange rate can get absorbed," said Tuffley.
The exchange rate effect can be felt quite quickly in areas where there is already keen competition, such as the used car market for example. But generally the impact is slow and that works the other way around too in times of extreme currency weakness.
"When the exchange rate plummets we tend to find that we do not feel the immediate effects of that for some time, because importers absorb it into their margins for a while as they wait to see whether it's a temporary or more permanent exchange rate movement," said Tuffley.
"If it is more permanent, then over time you start to get the impact filtering through, but certainly it's not immediate and it is fairly gradual process.
"If it's used cars, it tends to be a bit quicker, but if it's appliances, for example, there is a propensity for offshore companies who provide the equipment to be concerned with wanting to smooth out currency fluctuations so that their sales don't start getting volatile."
The Reserve Bank has looked into exchange rate volatility and its impact on inflation in 2001, and has discovered its impact on prices was not so great.
"The data confirms that the estimated coefficients are smaller than previously thought," the bank said then.
"A 10 per cent increase in import prices will lead to a 0.5 per cent increase in consumer prices within the first quarter, and to a 1.5 per cent increase over the long run."
