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OCR Should Be Cut To Preserve Growth Path

Media statement Tuesday, September 2nd, 2003

Interest rates should drop with inflation

The view of trading bank commentators that interest rates won't drop this week is based on an assessment of the economy's growth path, not on the outlook for inflation, the Employers & Manufacturers Association (Northern) says.

"Everyone seems to be forgetting that the Reserve Bank is required to control inflation, not the rate of economic growth," said Alasdair Thompson. EMA's chief executive.

"We can't see there is any inflation to control.

"Maximising growth while the inflation outlook is low is what we should be aiming for. We have a lot of catch up growth to achieve.

"The CPI for the year ended June was just 1.5 per cent and trending down; the Reserve Bank is required to keep inflation between one and three per cent. Hence the Bank has no reason to hinder growth.

"In fact the high New Zealand dollar is ensuring the price of imports is falling as growth in the domestic market declines.

"With exporters' income well below where it was a year ago, and with demand in retreat, there is room for the Bank to cut the Official Cash Rate by another 0.25 per cent this week."


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