Interest rate warning from bank economists

Economists at Westpac bank have issued a warning against calls for the Reserve Bank to lower the official cash rate (OCR) in a bid to weaken the New Zealand dollar.

Last week the New Zealand Manufacturers and Exporters Association called for the Reserve Bank to lower the OCR immediately to alleviate the strain of the NZ dollar's strength on exporters.

But today Westpac economists Brendan O'Donovan and Sharon Zollner said calls for a lower OCR to offset the exchange rate were misguided.

The relationship between the OCR and the currency appeared unstable, and it was not clear the New Zealand currency was overvalued, the economists said.

Rates below the current low 2.5 per cent for the OCR would fuel the sources of economic recovery now unfolding, including higher net migration, increased residential construction, higher house prices, and consequently a potentially reinvigorated consumer.

That could potentially lead to a higher, not lower, currency, the Westpac economists said.

"It is useful to keep in mind that the currency is always where it is for a reason."

The NZ dollar's trade weighted index recently of 62.2, compared with an average of 60.8 since 1985 and 61.6 since 1995.

"It is very close to its average level even though NZ's terms of trade (pre the big August Fonterra auction) are 14 per cent above their post-1995 average, and New Zealand's economy has come through the global downturn better than most," the economists said.

"The currency may well be telling us something. If the expected conditions that it is based on prove to be false, it will unwind of its own accord."

- NZPA