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RBNZ reduces OCR to 6.25 per cent

The Reserve Bank today announced that it was reducing the Official Cash Rate (OCR) from 6.5 per cent to 6.25 per cent, as inflation pressures in the medium term now seem more likely to ease than build.

This came with the release of the Bank's March 2001 Monetary Policy Statement.

Reserve Bank Governor Don Brash said "While most inflation measures have been accelerating, recent events suggest that by the time today's monetary policy settings have an effect, inflation pressures will actually be easing.

"For one thing, it now seems likely that headline inflation will retreat from 4 per cent quite quickly, reducing the risk of a spill-over into wage- and price-setting behaviour.

"For another, and more importantly, the international economy is slowing down faster than we previously thought. That slowdown will in time impact on our strongly performing export sector, and consequently ease inflation pressure."

Dr Brash warned that today's reduction had been a finely balanced decision and further reductions were not inevitable, as there were still risks that inflation would turn out to be more persistent than projected in today's Statement.

"At this stage, we do not know how severe the international slowdown may be, or how long it might last. ... If the slowdown turns out to be relatively brief, or if New Zealand's export prices hold up despite that slowdown, any substantial easing of monetary policy in New Zealand would be quite inappropriate."

Dr Brash noted that there were particular factors within New Zealand that had made the Reserve Bank especially cautious.

"Significant parts of the economy are operating at close to capacity. Fuelled by a still-stimulatory exchange rate and relatively buoyant commodity prices, many companies are stretched."

Dr Brash stated that the balance of risks was currently tipped marginally in favour of easing inflation pressures but "it is by no means inevitable that today's reduction will be quickly followed by further reductions."


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