Friday, July 20, 2007

NZ $ ride still valid.

I posted an article about rising NZ$, when NZD vs USD was 0.70, and now 0.79.
Well, its still valid.
Fonterra is paying out huge sums, so there would still pressure on inflation, only greater!
This article from NZPA.
Extra $250,000 tipped for dairy farmers
Enlarge image

Fonterra's 11,600 farmers look likely to get a payout boost averaging $250,000 each this season, double the rise forecast by Fonterra seven weeks ago, says a bank economist.

Westpac economist Doug Steel said international dairy prices had risen by a further 15 percent since Fonterra announced a record forecast payout of $5.53 per kg of milksolids in May. That forecast was a lift of 27 percent on last season and was due to give farmers an extra $1.5 billion in a milk payout of nearly $7 billion.

The latest indications are that international commodity prices have soared to levels that will enable a payout of around $6.60/kg of milksolids.

The avearge farm is expected to produce about 108,000kg, with some of the big farms producing four times as much.

Mr Shepherd said the extra surge of money into regional economies would make the Reserve Bank's job of trying to control inflation harder.

The Reserve Bank will review interest rates next week, with financial markets expecting another rise in the official cash rate. It is currently 8 percent after three increases to date this year.

Earlier this week, Westpac markets economist Sharon McCaw said the dairy sector was producing "white gold" for the New Zealand economy.

She said dairy prices increased by 2 percent per week over the past six weeks and doubled in a year.

Farmers will probably have to wait untill September to see if Westpac Bank's prediction of further increases in the 2007-08 payout is accurate.

New Zealand's milkflows hit a record high last season, passing 1.31 billion kilograms of milksolids for the first time.

Brash encourages Bollard to fire rate gun
| Friday, 20 July 2007

Reserve Bank Governor Alan Bollard must move quickly to squash strong domestic inflation, his predecessor Don Brash says.
Cullen admits trying to talk down dollar

A majority of economists are expecting Dr Bollard to hike interest rates when he reviews the official cash rate next week.

The dollar has hit 22-year highs on the back of the strong inflationary data which is underpinning those assumptions.

The high exchange rate is hurting exporters and prompted a new round of hand-wringing among politicians about what can be done to correct the overvalued dollar.

Finance Minister Michael Cullen has floated the idea of using powers available to him under section 12 of the Reserve Bank Act to suspend monetary policy, which would prevent further rate rises.

But Dr Brash today said Dr Bollard neeeded to ignore the static and get domestic inflation under control as quickly as possible.

Dr Bollard's only weapon for doing that is raising the official cash rate.

Dr Brash said Dr Bollard needed to send a clear signal to New Zealanders and the market that he intended to get on top of domestic inflation.

"Until those inflationary pressures are dealt with the exchange rate is going to remain quite firm," he said on Radio New Zealand.

"The reality is, the quickest way of getting the exchange rate down for the benefit of the exporters who are hurting very badly is to get on top of domestic inflation."

Dr Brash said economists who argued further rate hikes were unnecessary due to headline inflation running at 2 percent were ignoring the domestic inflation component of that which was running at well over 4 per cent.

The overall figure was brought down by dropping import prices from the soaring dollar.

But if the dollar dropped, which was inevitable at some stage, inflation in that area would rise rapidly and dramatically.

"He has to get on top of it quickly and the faster he gets on top of it the faster we'll see the exchange rate come down."

While hiking the rates pushed up bank interest rates the risk of not raising rates now would be longer-term more damaging interest rate rises.

He said it was "mischievous" of Dr Cullen to talk of using his powers under section 12 of the Reserve Bank Act when he had renewed the existing monetary policy targets agreement with Dr Bollard just a few weeks ago.

That agreement requires Dr Bollard to keep inflation within a 1 per cent to 3 per cent band in the medium term.

Dr Brash said Dr Cullen had to take a share of the blame for the strong domestic inflation as a result of strong growth in Government spending at a time when wages were already rising due to skill shortages and there was a booming housing market.

"That itself is fuelling domestic inflation."

He said the idea floated by some economists that cutting interest rates would lower the dollar by introducing an element of unpredictability to spook currency investors was "nuts".

"Cutting interest rates right now would undoubtedly stimulate domestic borrowing, stimulate domestic inflation and that's the last thing we need.

"If Dr Bollard was to cut rates and the perception was he had done it because of political influence, we may well get a drop in the exchange rate, but interest rates would go through the roof."

Dr Brash said the economy was not in crisis although it could feel that way for some exporters.


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