Editorial: Calls to focus on exchange rate should be ignored

The reliance on commodities and a floating exchange rate means there will also always be periods when they also benefit from a low dollar. Photo / Mark MItchell

Opinion

Times are very tough in manufacturing. The global recession has merely contributed an additional woe to a sector whose share of economic activity has been declining for more than two decades. An inquiry run by Labour, the Greens and New Zealand First has provided manufacturers with a platform to express their anguish over this state of affairs and what they see as the reasons for it. Virtually as one, they have highlighted the current high dollar. They want the Reserve Bank to be forced to focus on the exchange rate, rather than just inflation control. This is a recurring plea when the dollar is riding high. As in the past, it should go unheeded.

That will happen not only because the National Party is not part of this exercise and, indeed, blocked an official parliamentary inquiry. There are more fundamental issues related to the reality of this country's economy. The dollar has a marked tendency to rise and fall with world prices for our export commodities. When it is high, it makes non-commodity exporters, including manufacturers, and firms that compete with imports, less profitable.

But the reliance on commodities and a floating exchange rate means there will also always be periods when they also benefit from a low dollar. That situation will change, and greater currency stability will ensue, only if the economy is strengthened and substantially transformed, partly through New Zealand becoming more of an exporter of high-value products.

Despite this cyclical reality, the Greens, for one, support the call for the exchange rate to be part of the Reserve Bank's mandate. After all, they note, its Australian counterpart has multiple objectives. In practice, however, this notion is far from straightforward. Any attempt to orchestrate a lower exchange rate would be inimical to the sole focus on price stability of this country's Reserve Bank. It is extremely difficult to reduce the external value of the dollar without also lowering its domestic value, letting inflation loose.

There is nothing to suggest that New Zealand's present approach is wrong. The dangers of inflation should never be under-estimated. Nor should the fact that it penalises the poor and savers most. Lowering the external value of the currency would also make New Zealand assets cheaper to overseas buyers. The consequence of these assets being for sale at bargain prices is unlikely to be relished by those listening to the manufacturers' appeals.

Those MPs also know that when Labour was in power, it initiated several reviews of the monetary policy arrangements. These included the 2001 Svensson Review and a select committee inquiry which reported in 2008. Both recommended only minor changes to the status quo. The MPs also know that the multiple objectives listed in the Reserve Bank of Australia's mandate have not prevented the Australian dollar from becoming extremely strong. Indeed, that strength, in New Zealand manufacturers' biggest market, has been a significant offset to their struggles in other areas. That situation reflects the Reserve Bank of Australia's view of where its real priorities lie.

The outlook is not all bleak for manufacturers. Many will get a boost from the expected surge in construction activity over the next few years. The positive factors supporting the dollar now - relatively high commodity prices, especially, and higher forecast growth than many developed countries - will also pass. Manufacturers need to amend their long-standing view that the working of the Reserve Bank is responsible for their plight. Other factors, not least the emergence of China, have been far more significant. They need also to recognise that a low dollar will never be the catalyst for a higher standard of living.