The Press THURSDAY, SEPTEMBER 26, 1974. Restraining inflation after devaluation

Press, Volume CXIV, Issue 33649, 26 September 1974, Page 14

The Press THURSDAY, SEPTEMBER 26, 1974. Restraining inflation after devaluation

If New Zealand is to derive lasting benefit from the devaluation of its currency, the inflationary effects of the move will have to be restrained. Devaluation means a better return for exporters of primary products. All imports, except those from Australia, will be noticeably dearer. New Zealand’s change, though unavoidable after the Australian decision, is politically unattractive to the Government. The Minister of Finance had to recognise the close links between the economies of this country and Australia and concede that the effects of unilateral devaluation by Australia would be very damaging to New Zealand’s overseas reserves and the country’s trading position. Provided there is no further decline in the world demand for meat and wool the more competitive standing of our produce should result in an improvement in New Zealand’s balance of payments. The improvement, of course, will be subject to the demand for imports, even at higher prices, and the Government must still feel constrained to restrict imports. At the same time, the Government must have regard for threats of a recession which might damage the country’s export trade.

The revaluation of the New Zealand dollar by 10 per cent a year ago helped to reduce the rate of inflation here below that in most other developed countries. But the result was a spending spree on imports, already rising sharply in price, which weakened the country’s overseas exchange reserves. Falling export prices made the position worse. If the rise induced in the cost of living by dearer imports is passed on to consumers in higher wages and salaries no-one will be better off. Rural incomes will probably benefit from the higher return on exports only if farmers’ costs do not rise. Any renewal of business confidence will be as quickly eroded by further inflationary pressures as by threats of recession. The Government should be prepared to take the further politically unpopular step of refusing to allow the inflationary effects of devaluation to be taken into account when the next general wage adjustment is made in January. The country should resign itself to importing fewer luxury items and be prepared to pay higher prices for essential imports. A wage increase based on the effects of devaluation would not be justified by any greater productivity; it would set back hopes that inflation can be restrained and that the country’s trading account can be brought back towards abalance.

The manner in which the devaluation was decided on both sides of the Tasman undermines the Government’s claim that it enjoys a specially close relationship with its Australian Labour Party colleagues. The New Zealand Government appears to have had almost no warning of the measure from; Canberra; the timing meant that New Zealand was, forced into the absurd position of having to undertake a major currency change in the middle of a trading day. When Australia decided to devalue. New Zealand had little alternative but to follow; furthermore, it had a reasonable argument against the United States and other countries which have been resisting such currency adjustments. Because of the formula on which the New Zealand exchange rate is worked out, the Australian move, on its own, would have lowered the value of New Zealand’s currency by 3 per cent. The 9 per cent move by New Zealand restores the two currencies very close to parity. Trade with Australia will not be much affected, although it will now be cheaper for Australia and New Zealand to buy from each other than from other countries. Several exporting countries, particularly those competing with Australian manufacturers, will be displeased. Some food prices must be expected to increase a little in New Zealand because of the attraction of higher local earnings from exports. The extent of this increase will depend largely on New Zealand’s abilities to sell meat. When New Zealand last devalued in 1967 export meat prices showed a marked improvement and some wool prices eventually increased by as much as 25 per cent. The increase for wool this time is likely to be more modest and might well be less than 9 per cent. The depressed state of the wool market was just becoming evident a year ago when New Zealand revalued its currency by 10 per cent. The price of wool at the next sale fell 14 per cent and the decline has continued.

In general, the trading benefits which New Zealand and Australia hope to achieve will follow only if these countries’ main trading partners — Japan, the United States, Britain and Western Europe — retain their present exchange rates. The total trade of Australia and New Zealand is such a small proportion of the world total that these two devaluations will not, of themselves, warrant retaliatory' action by any major trading country. Even so, the risk of a round of competitive devaluations — self-defeating but highly damaging to world trade — has been increased by yesterday’s devaluations.