Reserve Bank cuts rate

By Phil Boeyen, ShareChat Business News Editor

Wednesday 14th March 2001

The Reserve Bank has dropped the official cash rate by 25 points to 6.25%, citing less medium term inflation pressure.

Reserve Bank Governor, Don Brash, says while most inflation measures have been accelerating, recent events suggest that by the time today's monetary policy settings have an effect, inflation pressures will actually be easing.

"For one thing, it now seems likely that headline inflation will retreat from 4% quite quickly, reducing the risk of a spill-over into wage and price-setting behaviour.

"For another, and more importantly, the international economy is slowing down faster than we previously thought. That slowdown will in time impact on our strongly performing export sector, and consequently ease inflation pressure."

Dr Brash says today's reduction had been a finely balanced decision and further reductions were not inevitable, as there were still risks that inflation would turn out to be more persistent than projected.

"At this stage, we do not know how severe the international slowdown may be, or how long it might last.

"If the slowdown turns out to be relatively brief, or if New Zealand's export prices hold up despite that slowdown, any substantial easing of monetary policy in New Zealand would be quite inappropriate."

The cut had been widely expected by financial forecasters and has been welcomed by the chief executive of the Employers & Manufacturers Association (Northern), Alasdair Thompson.

"Dr Brash is right to take a more pro active stance at this time to the downward volatility amongst our main trading partners," he says.

Financial firm HSBC says it expected a rate cut, and is cautiously upbeat about the growth outlook for the country.

"For the moment at least, the New Zealand economy is favourably 'out of sync' with those of many of our trading partners."

HSBC is forecasting GDP growth to average 2.5% in the year to March 2002, with strong growth at the end of this year and the beginning of next year.

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