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OCR increased to 5.5 per cent

OCR increased to 5.5 per cent

The Reserve Bank today increased the Official Cash Rate from 5.25 per cent to 5.5 per cent.

Commenting on the decision, Reserve Bank Governor Alan Bollard said "The New Zealand economy continues to perform strongly and this is being supported by further improvements in the global economy. However, domestic inflation pressures remain strong and annual CPI inflation looks set to rise over the year ahead, as we projected in our March Monetary Policy Statement. Moving interest rates to less stimulatory levels appears prudent to ensure inflation remains within the target range over the medium term.

"Looking forward, the Reserve Bank will continue to monitor the data to see what it implies for medium-term inflation. At this stage, it remains unclear whether the fall in the exchange rate over recent weeks will be sustained and thus what its impact on activity and inflation pressures will be. Within parts of the domestic sector, such as housing and construction, some data suggest a cooling in activity, but the evidence is mixed and pricing pressures remain strong. Given these uncertainties, a further adjustment to monetary policy cannot yet be ruled out.

"However, as noted in March, a number of factors are likely to have a dampening effect on inflation pressures over the next year or so, reducing the need for policy action. Two such factors would include a further fall in net immigration and the delayed effects of the recent high exchange rate on activity in the export sector.

"The Reserve Bank's next Official Cash Rate announcement will come with the release of a Monetary Policy Statement on 10 June 2004."

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