RB lifts interest rates again despite Cullen criticism

By NZPA

Wednesday 3rd July 2002

Acting Reserve Bank governor Rod Carr shrugged off both Finance Minister Michael Cullen's criticism and falling business confidence and hiked interest rates again today.

However, while he lifted the Official Cash Rate to 5.75 percent from 5.5 percent, he gave a strong signal that this rise -- the fourth in as many months -- could be the last in the current series, thanks to the appreciating currency and to a lesser degree the fragile US economic recovery.

He said there were promising signs that New Zealand's inflation would peak in the next two quarters a little lower than earlier expected.

Both the strengthening dollar and the weak US economy would reduce inflation pressures further out.

"Further (rate) increases were now rather less likely than was indicated in the Reserve Bank's May Monetary Policy Statement," he said.

He justified today's hike by saying the adjustment meant interest rates would "no longer encourage accelerated spending" and that it made sense, "given that the momentum of the New Zealand economy seems at least as strong as anticipated in May".

Dr Cullen has attacked the bank for aiming at the mid-point of the 0-3 percent inflation target, rather than simply keeping inflation within the band over the business cycle.

He repeated his criticism again today in notes for a speech in Auckland to the Employers and Manufacturers Association. However, a spokeswoman said last night he would not be commenting today on the RB's decision.

Dr Carr said that retail sales were at near record growth rates, helped along by very robust immigration flows and a strong tourist inflow. Export incomes, though declining, were still at historically very healthy levels, he added.

"Nonetheless, since May there has been a much sharper rise in the exchange rate than allowed for previously, which has had the effect of tightening monetary conditions.

"If the exchange rate appreciation is sustained, or goes further, some heat will be taken out of future inflation pressures, reducing the extent to which interest rates may need to rise in the months ahead."

Dr Carr also noted that since the bank's review of conditions in May, international markets, and US equity markets in particular, had suggested the US economic recovery had become more fragile.

He said that the balance of these factors would be the focus of the bank's next full review due on August 14.

Wall Street had yet another torrid night last night as concerns about the recovery, international conflicts and accounting scandals took the Dow Jones Industrial Average below the 9000 level overnight. It later recovered to be down 102 points, 1.1 percent, at 9007.75.

The New Zealand dollar has been one of the strongest currencies in the world this year, rising around 15 percent against the US dollar. The RB had projected in May that the trade-weighted index -- measuring the kiwi against the currencies of New Zealand's main trading partners -- would be 50.3 in the second half of 2002. Today it was at 55.56.

Today's rate rise was fully expected by economists and the surprise was the much more "dovish" tone signalled for future reviews. Nine of 12 economists polled by Dow Jones Newswires had forecast another quarter point rate rise in August.

"The RB will continue to increase the Official Cash Rate at upcoming reviews," WestpacTrust chief economist Adrian Orr said in a commentary published yesterday.

He said there were ongoing signs of inflation pressures building and the economy was expanding at a robust clip.

Dr Carr's signal of a halt to rate rises will come as a relief to exporters. The rises have been largely blamed for the rise of the New Zealand dollar. That has come in tandem with a fall in commodity prices which an ANZ Bank survey out today showed were still falling.

The dollar held steady immediately following the announcement at US48.85c.

"There's going to be claims the Reserve Bank's made a U-turn but that's basically responding to events that have occurred -- ie the sharper exchange rate," said UBS Warburg chief economist Robin Clements.

He said it was interesting that the bank was saying economic growth was at least as strong as the bank thought in May and that the exchange rate had reduced the extent to which interest rates may need to rise.

"It hasn't ruled out further interest rate increases, just not to the extent that they may have thought was appropriate in May," he said.

Westpac economist Nick Tuffley said he still saw further interest rates coming through "but we expect the tightening cycle to be a little bit more drawn out.

"We still see another 25 in August although there will be continued debate about whether that will happen and then we would see the Reserve Bank taking a pause probably until the end of the year around November."

National's finance spokesman David Carter said higher interest rates were due to "Labour's inability to deal with the real issues that will raise New Zealand's long term, sustainable growth rate."

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