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Rate rise next year not on, so enjoy Christmas

Media Release December 22nd, 2000

Interest rate rise next year not on, so enjoy Christmas

There are absolutely no reasons for interest rates to be raised at the first review of the Official Cash Rate next year on January 24th as some forecasters are suggesting, says the Employers & Manufacturers Association.

"Business and consumers can enjoy Christmas with the confidence that their interest rate payments will remain as they are for at least the first quarter next year," said Alasdair Thompson, EMA's chief executive.

"Though we have turned the corner on business confidence in the meantime, the economy is far too fragile, and the world economic outlook is far too volatile, for interest rates to be cranked up.

"Economic growth measured by GDP fell over the six months to September and struggled to reach 0.7 per cent in the last quarter, hardly a sign of an overcooked economy.

"The growth achieved came from record high agricultural prices along with the artificial boost from the massive drop in the dollar, neither of which are sustainable. It did not come from lifting productivity or higher value output.

"However what we have to be wary of are some early warning signs indicating next year could be tough. These include: * a big drop in demand on the Australian markets where half our exports go. * a fall in demand from markets in the United States, which has been our fastest growing market this year. * the lack of investment going into our employment and skills rich manufacturing sector, which includes dairy and meat processing. This declined again in real terms for the September quarter by a further 22 per cent. Investment has continued to fall in the sector, which accounts for two thirds of our exports, for well over two years. * our household debt levels have risen now on average to 120 per cent of disposable income, up from 100 per cent in 1997 and 50 per cent a decade before that. So there is no room for demand-led inflation.

"As the kiwi dollar gradually recovers, the heat from imported inflation is also subsiding. "The only risk outstanding is that some groups may press on for higher nominal incomes even though there is no extra productivity on a nation wide basis to pay for it.

"If that urge is restrained, then we can confidently predict there will be no interest rate rises for the whole of next year."

Further comment: Alasdair Thompson tel 09 367 0911 (bus) 09 303 3951 (hme) 025 982 024

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