Keep OCR on hold, farmers urge

Federated Farmers hopes the Reserve Bank will keep the Official Cash Rate on hold with little tradable pressure evident. Non-tradable pressures, particularly electricity, is now of concern

"The New Zealand economy is incredibly sluggish and inflationary pressures have been relieved by consumers and businesses retiring debt,” says Philip York, Federated Farmers economics spokesperson.

“Essentially, credit growth has slowed and consumer spending, as a percentage of gross domestic product, is forecast to fall by four percent by 2013.

“Internationally, the situation also remains precarious and patchy.

“While the UK economy grew at 0.5 percent in the June quarter for example, it was less than half of what was predicted. Yet that was more than double the New Zealand economy’s growth for exactly the same quarter.

"Federated Farmers is increasingly concerned about implications from the Commerce Commission’s decision on the weighted average cost of capital (WACC), for regulated industries.

“Under WACC, the electricity distribution companies and Transpower may be looking at more than an equitable cost of capital. We understand from the Major Electricity Users Group that, on a worst case basis, power prices could be forced up by up to half a billion dollars.

“This could increase average household power prices by five percent. That has major implications for competitiveness and the New Zealand dollar. It will also place upside pressure on the OCR in the first quarter of 2011.

“On top of non-tradable inflation in the form of the Emissions Trading Scheme, GST, ACC as well as local authority rates, such a non-tradable inflationary shock could force the Reserve Bank’s hand, driving up both interest rates and the exchange rate.

“That would be disastrous as the Kiwi has been appreciating against the US dollar. While conversely the dollar has been at lows against the Aussie, we’re at least opening up clear air between our economy’s.

“That’s not a bad thing because we’re seen internationally to be joined at the hip. But we just don’t need more reasons to drive the Kiwi higher against our other trading partners,” Mr York concluded.