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OCR reduced to 5.0 per cent

The Reserve Bank today reduced the Official Cash Rate by 25 basis points to 5.0 per cent.

Governor Alan Bollard said "In June we noted that there might be scope for a further modest reduction in the OCR, provided the evidence continued to point to reduced medium-term inflation pressures. On balance, a further reduction seems appropriate today.

"Looking forward, the evidence continues to suggest slowing economic activity and inflation in some parts of the economy, as we have been forecasting. This is most notable in the export sector, parts of which are now being significantly affected by the rise in the exchange rate over the past 18 months. Although in recent weeks the exchange rate has dropped slightly, it remains volatile, and there is still potential for it to appreciate further in the months ahead. This will depend partly on the international economy, which is fragile but has shown some brighter signs recently. If export sector activity continues to soften significantly, then further reductions in the OCR may be required.

"However, some of the downside risks to activity that we identified in June, such as those connected with SARS, climate and the electricity shortages, seem to be abating. Activity in a number of domestic industries, such as housing and construction, remains robust throughout much of the country.

"Housing activity has been boosted by the rapid growth in population and other demographic effects and is now strong. This in itself is no bad thing, but the Bank must be wary of any implications for CPI inflation. We note that housing sector inflation is already quite strong and some investors have unrealistic expectations about this.

"The June quarter CPI was weaker than we expected. However some of that was due to temporary factors like SARS and will not necessarily be sustained.

"Monetary policy has to contend with the offsetting effects of relatively robust domestic activity and inflation and the weaker activity and inflation being experienced within the tradable sector. We will pay close attention to the net effect of these forces in deciding whether there will be room for a further OCR cut in the September Monetary Policy Statement."


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