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RBNZ MPS: OCR reduced to 5.75 per cent

16 May 2001
NEWS RELEASE
Time
9.00 am

OCR reduced to 5.75 per cent

The Reserve Bank today reduced the Official Cash Rate (OCR) from 6.00 per cent to 5.75 per cent.

Commenting on the decision, Reserve Bank Governor Don Brash said: "Today's decision to reduce the OCR by 25 basis points reflects the balance of tensions between contradictory influences on the future path of inflation in New Zealand.

"Overseas, the economies of many of our major trading partners, and particularly Australia, the United States, Japan, and non-Japan Asia, have grown quite slowly in recent months.

"At home, business and consumer confidence have fallen, and investment spending has slowed. There is no sign of any widespread increase in asset prices, with the exception of the prices of some rural land, and growth in money and credit remains relatively weak. The drought may reduce next season's agricultural production, tempering growth in income and spending in the rural economy.

"However, there are other factors relevant to the inflation outlook which are pointing in the other direction. Specifically, the current dip in the international economy is still expected to be reversed next year. As well, the world prices of some of our major commodity exports have so far been particularly strong despite the recent weakness in our trading partners' growth rates.

"In addition, the low exchange rate is providing useful insulation against the slowing world economy. Unemployment is currently near 13-year lows, with many reports of employers having difficulty finding staff. Similarly, some measures of capacity utilisation suggest little scope to increase output substantially without an increase in inflation.

"At this stage, if events unfold as described then we see inflation settling back near the middle of our target range with something close to the current interest rate settings. However, other outcomes that are less benign - in either direction - can be easily envisaged, which would require more vigorous monetary policy responses. Thus it is prudent to adjust policy cautiously, as we observe the evolving balance of those influences," Dr Brash concluded.

ENDS

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