Interest rate falls again

By Phil Boeyen, ShareChat Business News Editor

Wednesday 16th May 2001

The Reserve Bank has dropped the official cash rate by another 25 basis points to 5.75%.

Reserve Bank Governor, Don Brash, says the decision reflects the balance of tensions between contradictory influences on the future path of inflation in New Zealand.

"Overseas, the economies of many of our major trading partners, and particularly Australia, the United States, Japan, and non-Japan Asia, have grown quite slowly in recent months.

"At home, business and consumer confidence have fallen, and investment spending has slowed. There is no sign of any widespread increase in asset prices, with the exception of the prices of some rural land, and growth in money and credit remains relatively weak.

"The drought may reduce next season's agricultural production, tempering growth in income and spending in the rural economy."

However Mr Brash says it remains prudent to adjust policy cautiously because there are a number of factors which could see inflation rise.

"Specifically, the current dip in the international economy is still expected to be reversed next year. As well, the world prices of some of our major commodity exports have so far been particularly strong despite the recent weakness in our trading partners' growth rates.

"In addition, the low exchange rate is providing useful insulation against the slowing world economy. Unemployment is currently near 13-year lows, with many reports of employers having difficulty finding staff.

"Similarly, some measures of capacity utilisation suggest little scope to increase output substantially without an increase in inflation."

The Reserve Bank says at this stage it sees inflation settling back near the middle of its target range of 0 to 3%.

The interest rate cut has seen a number of banks immediately drop their variable home lending rates to match, down to 7.70% from 7.95% previously.

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