KEY POINTS:
Exporters have welcomed the Reserve Bank's expectation of a significant weakening in the New Zealand dollar.
In its June monetary policy statement released yesterday, the Reserve Bank is predicting the New Zealand dollar Trade Weighted Index (TWI) to fall 14 per cent over three years, with a possibility of a much faster and deeper fall.
The TWI measures the New Zealand dollar against the currencies of Australia, Japan, the United States, the United Kingdom and the eurozone.
Exporters stand to gain from a lower TWI but it also brings with it an increase in the price of imported goods and a reduction in household purchasing power.
The kiwi fell yesterday to close at US76.57c, down 1.8 per cent from US77.95c prior to the Reserve Bank announcement that it was leaving the official cash rate unchanged on 8.25 per cent.
Meat & Wool New Zealand chairman Mike Petersen said an easing in the exchange rate would be good news.
"We've got record prices for beef in the States at the moment and that's not getting back to farmgate level because of the high currency.
"It will certainly be a big relief for sheep and beef farmers on the export side, but of course the downside is that our imported costs of fuel and fertiliser will take a huge rise. "We would welcome some currency relief but we also don't want it to fall out of bed." A rate of 65c to the US dollar would be manageable, he said.
BNZ currency strategist Danica Hampton said the Reserve Bank's TWI projection was consistent with their own forecast.
Slowing growth, easing global commodity prices and an expected cut in interest rates suggested some downside risk for the currency.
Hampton said the bank was forecasting for the New Zealand dollar to fall to US69c by the year's end.
"If you're going to put a balance of risk into our forecast, it's that when the currency actually starts to fall, it'll actually fall further than what we're pricing in. People tend to characterise it as a currency that goes up by the stairs and down by the elevator."
Fisher & Paykel Appliances chief executive John Bongard expected the exchange rate to ease as interest rates start falling.
"That would be good from an export perspective without a doubt, much needed relief." But he questioned the merit of the current system of controlling domestic inflation.
"The Reserve Bank's really got its hands tied behind its back - the only thing that it can really do is play around with the OCR [official cash rate]. I think it's ineffective today. It might have been effective when it was first introduced but most other western economies have moved along from that rather one dimensional thought."
Manufacturers and Exporters Association chief executive John Walley said the Reserve Bank should not wait until September to start cuts in the OCR.
"Changes to the OCR need to respond to current economic conditions in New Zealand and they are worsening. Early cuts are unlikely to have much of an impact on high street rates, but the impact on the exchange rate will help an export-led response to the slowdown.
"The sooner this happens the better - there is little downside to cutting sooner than later. It is not a time to be timid."
Employers & Manufacturers Association Northern chief executive Alasdair Thompson said the current monetary policy was "futile" in dealing with the current economic pressures. "You can't actually influence international prices through manipulating the OCR here. That's a futility, fighting inflation that is based on international supply and demand pushing prices up."
