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Further Cut To Interest Rates Forecast

A further cut to our interest rates of half a per cent or more will be needed to keep growth on an even keel when the Reserve Bank reviews the Official Cash Rate in May, says the Employers & Manufacturers Association.

"Interest rate levels in the US and Australia are now being set directly in response to business and consumer confidence, said Alasdair Thompson, EMA's chief executive.

"Going on these factors, the US Federal Reserve will wipe another 0.5 or 0.75 per cent off the official interest rate in the US tomorrow, to go to 5 or 4.75 per cent.

"That's a stark message on what Americans think is happening to them. A poll last Friday found 71 per cent of Americans believe they're headed for recession.

"Australia is going the same way; their interest rates are expected to go below 5% too soon.

"The Treasury report over the weekend made the bullish and welcome comment that our economic growth could be sustained in spite of the troubled outlook overseas, so long as our dollar stayed low and the recessionary factors off shore were short lived.

"At 84 cents to the AUD the cross rate is no longer low, and our exporters to Australia are no longer "comfortable". In addition, the fall in Australian imports is the sharpest since the recession of 1991.

"Economic growth in our third main trading partner, Japan, has stalled. A credit crunch is looming there, which will deliver another blow to Japan's confidence.

"Consumer confidence in Europe for our food exports is also looking increasingly precarious due to their commercial sabotage.

"Dr Brash may discount global trading conditions and base the next interest rate setting solely on local inflationary pressure.

"If inflation is judged still to be a risk, and interest rates are not moved down, the export and investment sectors will take the hit again as our exchange rate will be held higher than Treasury wants.

"Our modest 2.2% forecast growth rate over the next 12 months would then be undermined.

"The present spike of inflationary pressure should be behind us by May, with inflation back within the target range and with ample room for a further interest rate cut."

Further comment: Alasdair Thompson tel 09 367 0911

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