Interest rate stable

By Phil Boeyen, ShareChat Business News Editor

Wednesday 15th August 2001

Few will be surprised by the Reserve Bank's decision not to touch the official cash rate.

The bank has left the rate unchanged at 5.75%, where it has been since a 25-point rate cut in May.

Governor Don Brash says while the CPI should track back to somewhere near the middle of the bank's inflation target by mid next year, there are risks to that assessment.

"Inflation could turn out to be more persistent than currently seems likely.

"There are an increasing number of indicators suggesting that the economy may be operating slightly above full capacity. Also, if headline inflation remains close to the top of the target range, the risk is that inflation expectations may go up, leading to adverse consequences for wage and price-setting."

Mr Brash says the bank doesn't regret its relatively cautious manner of reducing the interest rate in recent months, which is supported by a confident business outlook, high rural incomes, high employment intentions and strong signs of a pick-up in both confidence and activity in residential construction.

"The current situation would point to an early increase in the official cash rate were it not for the risk that the international environment will turn out to be even weaker than assumed.

"The flow of economic indicators from the United States, Japan, non-Japan Asia and Europe makes a deeper and more prolonged slowdown seem quite likely."

Mr Brash says if the international environment turns out substantially weaker than the bank's projections, the disinflationary pressures on New Zealand coming from overseas would intensify.

"As a result, inflation could fall into the bottom half of our target range and this would necessitate further easing of monetary policy."

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