KEY POINTS:
We have core inflation falling, the highest interest rates in the developed world, and many export sectors under stress from our high dollar.
The latest data affecting inflation shows that the consumer price index (CPI) increased an average 2 per cent in the past year. Just a year
ago, CPI inflation had climbed to an oil-driven high of 4 per cent.
Even with oil excluded from the data, underlying inflation has dropped from about 3 per cent to 2 to 2.5 per cent in the same period.
It is not only inflation that is moving in the right direction to justify the Reserve Bank reducing interest rates tomorrow - or, if this is too bold a move, holding the official cash rate at its present 8 per cent.
The fragile state of the economy requires that the Reserve Bank seriously considers cutting interest rates.
Business surveys point to falling confidence and gross domestic product (GDP) growth of only 1 to 2 per cent in the medium term, compared with the Reserve Bank assumption that the economy will grow by an average 3 per cent in each of the next two years.
The KiwiSaver scheme and reduced immigration quotas unveiled this month will take money out of the economy.
And other than the dairy sector, primary product and manufacturing prices are flat or declining, and prospects are very unhealthy if interest rates go higher.
Most importantly, our export-led economy is hurting. Dairy export returns are rising, fuelled by global climate-change policies that encourage farmers in the United States and elsewhere to switch from dairying to growing crops for renewable fuel production.
But other exporters, especially small to medium enterprises, are on a knife-edge. Dairying generates about 25 per cent of New Zealand foreign exchange returns. The other 75 per cent comes from wine, meat, wool, seafood, manufactured goods and tourism.
These sectors are suffering badly from the artificially high dollar New Zealand is experiencing as a result of two main trends.
First, since April and the launch of the Reserve Bank campaign to drive up interest rates, our dollar has appreciated by about 10 per cent against the currency of Australia, Japan, Europe and the United States.
By keeping interest rates comparatively high, the Reserve Bank is making life tougher for New Zealand businesses wanting to be internationally competitive, but easier for global capital markets to make healthy money from this country.
Second, with the US dollar also weakening, no end is in sight to the rise of the New Zealand dollar and increased damage to export-led businesses.
Many commentators predict that the cash rate will be lifted from 8 to 8.25 per cent tomorrow.
If that happens, the Reserve Bank will be reinforcing the attractiveness of this country for capital seeking safe profit from our high interest rates. Imports will become cheaper, and in turn encourage spending, which will add to inflation pressures.
Sacrificing our essential and innovative export industries for this kind of outcome is unacceptable. Plenty of hard evidence exists to support the bank taking a decision to cut interest rates and deliver an economic bonus by helping exporters.
The Reserve Bank practice of pushing up interest rates even though inflation is falling is in sharp contrast to how the Reserve Bank of Australia operates.
The Australian currency is also appreciating against the US dollar, although not to the same extent as the New Zealand dollar, but the Reserve Bank of Australia's approach is to intervene only when it sees hard evidence of rising inflation.
Australia's Government is also keeping a tighter lid on government spending. In New Zealand, it is government spending that is causing most of our inflation.
We have a history of the Reserve Bank moving in too late then staying too long.
If it is smart it will recognise this with a decision that doesn't send more exporters to the wall and the economy further off the rails.
* Michael Barnett is chief executive of the Auckland Chamber of Commerce.
