Farmers call not to raise OCR vindicated by events
Released 16 Jul 2010
Federated Farmers warning last month that the Official Cash Rate (OCR) should have been kept on hold has been vindicated with a lower than expected rise in the Consumers Price Index - driven by weak housing and retail sales - as well as a more precarious international trading environment.
"Last month, Federated Farmers warned that while there is some good news in terms of soft commodities we were extremely cautious that this floor wasn't solid in many of our major markets," says Philip York, Federated Farmers economics and commerce spokesperson.
"The most recent globalDairyTrade trading event index fell 13.7 percent and follows on from the bad news in the NZIER's June Quarterly Survey of Business Opinion. This showed a drop in business optimism and business activity.
"Over a third of New Zealand businesses now expect business costs to increases while 40 percent seem to expect their prices will have to increase.
"This reflects a fiscal policy perfect storm of the emissions trading scheme, excise tax increases, ACC and the impending rise in GST.
"This Government-led inflationary bomb is yet to be reflected in inflation data but the Reserve Bank should look through any short-term spikes like GST to the very weak private sector data. The dollar's current strength is tightening monetary conditions as well.
"While we're happy to see the annual increase for non-tradables being no more than 2.3 percent for the past three quarters, whereas annual increases were at least 3.0 percent for the previous eight years, tradable goods rose 1.1 percent in the year to the June 2010 quarter.
"The only bright economic spot remains agriculture-led exports but then the international picture is exceedingly fragile.
"This is why we need the Reserve Bank to back an export led recovery through the judicious use of monetary tools. For the Government, it needs to seriously reflect upon fiscal policy decisions.
"In the United States, the world's largest economy, June's non-farm payroll figures were disappointing and raised a spectre that the United States economy may be entering a double-dip recession.
"Given Europe is in a bad way economically, only Asia is looking bright, but then again the Chinese economy's growth is being wound back to avoid an economic blow-out.
"This is why the Reserve Bank needs to be extremely cautious with July's OCR decision," Mr York concluded.
For further information contact:
Philip York, Federated Farmers economics & commerce spokesperson, 027 290 5418, 09 292 8843
