Pre-float exchange rate predicted

Press, 19 December 1985, Page 6

Pre-float exchange rate predicted

Welington reporter New Zealand’s exchange rate will fall to a pre-float level by the middle of next year, according to the Institute of Economic Research. ' The consumers’ price index is forecast to be 14.4 per cent for th year to March 31 and 16.8 per cent for the year to March, 1987, which will include a rise of 5.5 per cent when G.S.T. is introduced. The institute’s latest quarterly predictions, published yesterday forecast a gradual depreciation of the dollar at a rate of 5 per cent a year after the return by June, 1986, to about the level it was before the float

last March. The institute says there is obvious uncertainty about the timing of the dollar’s fall between now and next June. Because the dollar’s strength has held up late this year, the institute says, the average exchange rate for the present year to March 31 will be 1.5 per cent higher than in 1984-85. For the 1986-87 year, an average exchange rate depreciation of about 8.5 per cent is forecast. The institute says that if the dollar’s depreciation is slower than its forecasts, contraction in the economy will be more severe and

longer than now expected, unemployment will be higher, and inflation will be lower. Price inflation is forecast to peak in the December, 1986, quarter at an annual rate of 18.3 per cent. The institute’s prediction on the final Government Budget deficit for the present year is $l.B billion, higher than the Government’s own estimate of $1.6 billion. The institute says the tight monetary policy is now working to depress spending decisions in the economy and inflationary forces. This is in spite of continuing high growth in

the monetary aggregates, which are normally used to measure the imact of monetary policy. The institute says the concern about monetary policy now is its impact on the present wage round. Contractionary monetary policy and the wage round imply incompatible goals for growth in New Zealand’s nominal income. “Over a one year to two year period, what gives way is usually real output, real growth, and unemployment. That is likely to be the monetary dilemma during the coming year,” says the institute.