Reserve Bank plays it safe

Media release 24 January 2001

Reserve Bank plays it safe

"There were only two sensible options for the Reserve Bank of New Zealand official cash rate review; to hold interest rates or ease them," says Alasdair Thompson, Chief Executive, Employers & Manufacturers Association (Northern).

"The Reserve Bank chose the more conservative of these two options in maintaining its OCR at 6.5%.

"With the global economy slowing down and with our interest rates relative to other countries now quite a bit higher, an interest rate rise in New Zealand was out of the question," says Mr Thompson.

"An interest rate reduction at the next OCR review is still on the cards.

"The US Federal Reserve is expected to further reduce its interest rates as are other countries as they confront retreating growth rates.

"Debt levels in the US, as in New Zealand, are high. Spending is slowing rapidly and US corporate debt is going bad. The US stock exchange, especially the Nasdaq, is likely to take a beating in 2001 with some predicting it will fall as much as 50%. That will drive Americans to cash up and reduce their debt levels.

"What happens in the US effects the rest of the world. World trade growth will decline.

"The case for lower interest rates is mounting. The ANZ Job Ads Survey released last week showed a sharp drop in job ads in December. Retail sales statistics also showed a 0.2% drop in November.

"The latest annual CPI increase of 4% has peaked and economists are predicting inflation will be back below 1.5% by year's end.

"The main inflationary risk now is if wage and salary earners gain pay increases that exceed their growth in productivity," cautioned Mr Thompson.

"Hopefully, most people know that we cannot be compensated for imported price increases which make us poorer," concluded Mr Thompson.

Further comments: Alasdair Thompson Phone: Business 09 367 0911 Home 09 303 3951 Mobile 025 982 024

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