Steady hand right decision for NZ: Brash

By BRIAN FALLOW economics editor

Reserve Bank Governor Don Brash is making no apologies for being slower to cut interest rates than other central banks.

In a speech to Auckland Rotarians yesterday, Dr Brash repeated the view that New Zealand is favourably out of sync with the rest of the world, and cited three main reasons he has eased monetary policy more gingerly than some of his peers:

* Although world economic growth has slowed, it has not stalled.

Only a few commentators now think the United States will go into recession this year, Dr Brash said, and US sharemarkets had rebounded. The Dow Jones Industrials Average is only 5 per cent below its all-time high.

The Australian economy contracted in the December quarter, but that was mainly a post-GST decline in the construction sector; and the rest of the Australian economy continued to grow at 4 per cent annually.

Even in Japan there are hopes of a new political will to tackle its longstanding economic problems.

* New Zealand's export commodity prices have generally held up surprisingly well. World prices for New Zealand's commodity exports last month were 14 per cent higher than a year ago, and 23 per cent up on two years ago.

* A further buffer is provided by the dollar, which is not far from its all-time lows against the US dollar, and also low against the yen and sterling.

The Reserve Bank is perplexed by how little export volume growth New Zealand has to show for this very stimulatory exchange rate.

"Perhaps it just takes longer than we might have thought for businesses to gear up to increase exports," Dr Brash said.

"Perhaps businesses have been frightened by media stories about the slowing in the world economy.

"Perhaps businesses were so traumatised by the experience of a strong exchange rate in the mid-90s that they will respond only cautiously to the apparent enticements offered by the now-low exchange rate."

Then again it might be that other countries with which New Zealand exporters compete have experienced similar levels of exchange rate depreciation against the US dollar, eroding any competitive advantage.

For many NZ exporters the Australian market is still the major market, and here there has been little depreciation against the Australian dollar in the past few years.

Historically, export and import-competing industries responded to a low exchange rate by investing in new capacity, hiring more staff and expanding production.

That might still happen and if it did, interest rates would need to be quite a bit higher than present, if resources were able to move from the domestic parts of the economy to the export and import-competing industries without causing inflation, Dr Brash warned.

If, on the other hand, the economy should not respond to the low exchange rate as it had in the past, and the export and import-competing industries expanded only modestly, monetary policy would not need to be so tight to keep inflation under control.