RBNZ gives its frame for the debate on manufacturing and the exchange rate!

By Matt Nolan 21/02/2013

Excellent.  The RBNZ has come out and discussed what is going on with manufacturing, what monetary policy can achieve, and the fundamental point that any “failure” stems from distortions in the domestic economy – not from flexible inflation targeting.

Globalisation, outsourcing, and international supply chains, along with competition from low cost producers and rising global demand for services, mean that the relative importance of manufacturing has been declining in all but the poorest countries for the past 40 years. New Zealand is no exception. Although the exchange rate is an important headwind for some manufacturers, the overall relative decline in our manufacturing sector is much more than a simple exchange rate story. Looking ahead, total manufacturing output is expected to increase significantly as a result of the NZD$30 billion Canterbury reconstruction.

There are no simple solutions available to the Reserve Bank on the exchange rate challenges we face. The causes of the over-valuation partly lie in the spillover effects of policies in countries most severely hit by the global financial crisis. The Bank will intervene when circumstances are right. We will use the OCR as circumstances require and we’re exploring the scope to use macro-prudential instruments that address increasing challenges to financial stability associated with ongoing increases in house prices, and that can also support monetary policy. But further efforts to improve the level and productivity of capital that labour works with, to reinforce ongoing fiscal adjustment, to re-examine the factors that diminish and distort the incentives to save and invest, and to reduce dependence on the savings of others, have to be a major part of the solution.

Unsurprisingly I agree with this heavily, and I’m really glad to hear these guys come out saying these things :)

I’ve been wanting the RBNZ to reframe the debate on monetary policy for some time.  And I’m also in agreement with the fact that manufacturing is shrinking (in a way akin to the agricultural revolution) and that this is likely to continue!

The Bank has written on, and heavily researched, all these things in the past – research that has helped me build a view that is no doubt similar to there one.  It is nice to see them come out and say it all directly … it also means that I feel more comfortable that I haven’t misinterpreted them in the past ;)

The one note of difference is that I am uncertain whether I believe in the slight tacit suggestion of a currency war here, something I’m not sure I agree with.  However, they may well be using a very specific view that there is currently a “bubble” in the NZ dollar.  If there has ever been a “bubble in the New Zealand currency” I suspect that the best case can be made around now – and they will have a much better handle on that than I ever will.