RBNZ: OCR raised to 5.75 per cent

NEWS RELEASE

Date
15 March 2000
Embargo
9.00 a.m.

OCR raised to 5.75 per cent

The Reserve Bank today increased the Official Cash Rate (OCR) from 5.25 per cent to 5.75 per cent with the release of the March 2000 Monetary Policy Statement.

Reserve Bank Governor Don Brash said: "Even after today's adjustment to the OCR, we see monetary conditions as providing stimulus to the economy, though less than previously. Today's announcement reflects the fact that the economy has been growing since the middle of 1998, to the point where, in our judgement, the spare capacity evident over the past two years or so has been almost completely used up.

"Inflation presents no immediate threat. Indeed, recent surprisingly low inflation data raise the possibility that the onset of inflationary pressures may be weaker, or more delayed, than earlier experience would suggest. But the downward pressure on inflation from surplus productive capacity in the economy has now all but gone. Were monetary conditions to remain as stimulatory as in recent months, the risk of inflation becoming a problem would increase, and potentially require more marked increases in the OCR later on.

"In that sense, today's action is fully consistent with the recent amendment to the Policy Targets Agreement, which requires the Bank to "avoid unnecessary instability in output, interest rates and the exchange rate". In other words, moderate action now reduces the risk of having to take more vigorous action later.

"Looking further ahead, there is considerable uncertainty as to how much the strong economic growth that we expect - supported by robust demand from our trading partners, a low exchange rate, and a recovery from two years of drought - will eventually flow through into inflationary pressure. Our current projections suggest that monetary policy will need to restrain demand somewhat over the next two years, although less so than at this stage of previous business cycles. Whether we will actually need more or less tightening than that depends on how the economy develops compared to what we now project.

"One important issue will be how the exchange rate evolves, and why. If the exchange rate remains at a low level because of weak commodity prices, for example, there may be no need to adjust monetary policy. But if the exchange rate remains low despite improving commodity prices, then overall demand pressures may grow, and may require more tightening in monetary policy than now projected. At the moment the Bank is reserving its judgement on this," Dr Brash concluded.

For further information contact
Paul Jackman
Corporate Affairs Manager
Ph 04 471 3671, hm 04 938 8177, pager 026 105 085, E mail Jackmanp@rbnz.govt.nz

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