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OCR Increased To 5 Per Cent

The Reserve Bank today increased the Official Cash Rate from 4.75 per cent to 5 per cent.

Reserve Bank Governor Don Brash recalled "In the last few months of 2001, the OCR was reduced by 100 basis points because we were concerned about the deflationary risks arising from a very weak world economy.

"Since our last Statement, the New Zealand economy has been stronger than we expected. Indeed, the economy is already operating at close to full capacity, and indications are that pressures will grow further in the absence of some increase in interest rates.

"Both consumer and business confidence have bounced back to pre-11 September levels. After a brief pause in October, retail spending has been strong. Visitor arrivals have recovered quickly. Turnover in the housing market has been high, and residential investment has surged. In recent months there has been a sharp turnaround in net migration.

"The risks to the global economy also look less threatening. Economic activity in the United States has picked up more quickly than most observers expected late last year, and the Australian economy looks robust.

"Nevertheless, the global economy is still not particularly strong. It seems likely that on average our trading partners will grow only moderately this year, and significant risks remain. The Japanese economy continues to have major difficulties, the US recovery could stumble over the high level of debt already accumulated, and global equity markets remain vulnerable to further weakness.

"Even after today's decision, monetary conditions remain stimulatory. Today's increase in the OCR simply represents some withdrawal of monetary stimulus, much of which was put in place as insurance against risks which have now receded. At the moment it seems likely that there will need to be some further reduction in monetary stimulus over the months ahead," Dr Brash concluded.

Ends

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