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Any Interest Hike Next Week Extremely Damaging

June 27th, 2002

Any Interest Rate Hike Next Week Extremely Damaging

Economic signals abroad and at home indicate there should be no increase in interest rates next week, certainly not a rise as many economists were expecting, the Employers & Manufacturers Association (Northern) says.

"The Reserve Bank got its inflation forecast wrong for the March quarter this year, and is in danger of getting it wrong again," said Alasdair Thompson, EMA's chief executive.

"For March the Bank in its Monetary Policy Statement said the CPI would be 0.9 per cent; it was wrong by half. The actual figure was 0.6 per cent.

"For the June quarter the Bank said in its MPS that CPI inflation would be 1.1 per cent. With the food price index just released going down 0.8 per cent, its difficult to see where the Bank's forecast will be borne out.

"We challenge the Bank to identify where the inflationary pressure is coming from.

"Another interest rate rise at this time is almost certain to accelerate the inflow of offshore funds seeking short term, guaranteed returns. This would boost the exchange rate further and trigger an implosion of business confidence.

"The rapid ascent of the New Zealand dollar over the past 6 weeks went two cents ahead of Australia's cross rate with the US dollar, indicating the rise was due to more than just a weakening in the US dollar.

"Along with the fact that government bond tenders have been five times oversubscribed, there is good evidence that overseas fund managers are using New Zealand as a sure bet for both interest rate arbitrage and higher exchange rates returns.

"A higher interest rate now would have them yelping with pleasure at our expense.

"Business conditions internationally are extremely uncertain in the US and Europe.

"There is no sign of the sustained recovery in the US hoped for a few months ago. The outlook is flat and beset by scandal. Markets in Europe have gone nowhere for the past four months.

"Two independent surveys, including EMA Northern's Business Conditions, show business confidence at home is definitely down. The Bank's earlier quick draw interest hikes have done the job already.

"World prices for our commodities are expected to wipe $1.2 billion from dairy sector returns alone over the coming year. Lower sales from Mystery Creek affirmed the agriculture sector is exercising well advised caution.

"If the Reserve Bank is still thinking of raising interest rates next week we urge it to think again."

Ends

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