Rates cut but Brash still cautious

By Phil Boeyen, ShareChat Business News Editor

Thursday 19th April 2001

The Reserve Bank has dropped interest rates by 25 points to 6% but remains wary of further cuts despite the surprise easing by the US Federal Reserve.

Reserve Bank Governor, Don Brash, says the main reason for cutting the Official Cash Rate for the second month in a row is slowing growth in New Zealand's main trading partners.

"This slowdown in global growth will have an adverse impact on demand for our exports, and is likely to reduce inflationary pressures in New Zealand.

"However, world prices for our commodities remain robust, and the exchange rate has fallen back since March. These unexpected developments, if they persist, could take much of the disinflationary sting out of weakening global demand."

Despite today's cut, which had been widely predicted in the wake of a fall in business confidence and lower-than-expected inflation, Mr Brash is continuing to play the cautious card, indicating further cuts are not a foregone conclusion.

In the US the Federal Reserve announced a cut in short-term interest rates of 50 points to 4.5%, one month ahead of its scheduled meeting.

The Fed says although there has been a significant reduction in excess inventories and consumption and housing expenditures have held up reasonably well, capital investment has continued to soften.

"The persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seems poised to dampen capital spending going forward," the Federal Reserve says in a statement.

"This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, threatens to keep the pace of economic activity unacceptably weak."

The move added fuel to already improving markets yesterday, pushing the Dow up 3.9% and the Nasdaq up 8.1% to their strongest closing levels in over a month.

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