Weakening dollar to offset price drop

Dominick Stephens, Westpac’s chief economist, told Rural News that the slowing global economy will cause a dip in New Zealand’s export prices. He notes this is already happening with dairy prices and believes there will also be a shakedown for meat prices with both lamb and beef prices dipping in the short term. 

But he’s confident for the longer term outlook. Stephens is predicting that a fall in the New Zealand dollar will continue to provide a buffer for farmers. 

“We’ve pointed out over the years is that the New Zealand dollar does act as an effective buffer  at least for dairy farmers and for sheep meats, although not necessarily for beef. So what tends to happen is that as global food prices fall, the dollar falls and the impact for farmers is moderated.” 

Stephens says there’s a double reason why we can expect the exchange rate to fall. “Firstly we expect a dip in global food prices, but the other one is that investors around the world are becoming wary of small volatile places like New Zealand and so we think the decline in the exchange rate could be bigger than you’d normally expect.” 

Stephens expects the New Zealand dollar to be around US70c. At the end of last week, the dollar was hovering around US74c.

The main reason why global food prices will fall is because of what’s going on in Asia, he says.

“The Asian economy has been fairly resilient to what’s going on in Europe, but China and India has been steadily tightening monetary policy and I think they are going to get their wish to slow their economy and therefore bring food prices down a little bit.”

Stephens says the best case scenario in the Eurozone is a recession involving banks tightening up on lending and governments cutting back on spending. The worst case scenario would be a banking crisis which would be pretty severe. 

“But whatever happens, we do think the Eurozone is heading into recession and it’s just another cause of lower demand really for food products although the effect on New Zealand will be minimal. The main impact in New Zealand from Europe will really be credit.”

He believes with the banking systems in Europe stretched, New Zealand banks may find it more difficult to obtain funds from overseas and that could precipitate an increase in interest rates – including lending to farmers.

Overall, Stephens thinks that interest rates in New Zealand need to rise. 

“We have huge reconstruction tasks ahead of us in Christchurch and I think what could happen there is as we drag people into the construction industry, unemployment will fall rapidly. The cost of construction will rise which will have impacts for farmers. Those two things will put a bit of pressure on inflation forcing the Reserve Bank to respond with higher interest rates,” he says

But he also thinks that despite this pressure the Reserve Bank will not raise the official cash rate (OCR) until next year.