Reserve Bank keeps interest in check

By Phil Boeyen, ShareChat Business News Editor

Wednesday 23rd January 2002

New Zealand's stronger domestic economy is behind the Reserve Bank's latest decision to keep interest rates at current levels.

In its announcement early Wednesday the bank said the official cash rate would remain unchanged at 4.75%, the same level it was cut to following a half-percent drop last November.

Reserve Bank chief, Don Brash, says the decision reflects a balancing of risks between a domestic economy that seems rather more buoyant than expected last November and continuing weakness offshore.

"As expected in November, growth in the economies of our trading partners has continued to be sluggish. Notwithstanding a widespread expectation that a global recovery is imminent, there remains a material risk that the situation could deteriorate further.

"The outlook in Japan is of particular concern. Commodity prices for New Zealand's exports have fallen quite substantially, and rather earlier than expected."

However Dr Brash says there is a combination of factors domestically that suggest activity is currently running quite strongly.

"Consumer spending appears more buoyant than expected previously, and indications are that business investment is also holding up better than expected. The housing market has strengthened in recent months, and the labour market continues to be relatively tight."

Recent figures indicate that consumer price index inflation for the year to March 2002 is likely to be well above 2% and Dr Brash says that would become a concern if any resultant increase in inflation expectations were reflected in price and wage setting behaviour.

"These factors are pushing inflation in opposite directions. In the weeks and months ahead, the bank will be watching closely to detect which set of pressures is beginning to predominate."

Most economists had picked that there would be no change in the OCR because of strong domestic indicators and a number are forecasting that the rate will be tightened later in the year.

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