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Interest Rate Rise Not Inevitable

8 June, 2004

Interest Rate Rise Not Inevitable

"While an interest rate rise is the inevitable response to perceived and real inflationary pressure, several anti-inflationary conditions still exist," says EMA Chief Executive, Alasdair Thompson.

The Governor of the Reserve Bank of New Zealand, as well as taking account of inflationary pressure, will also be mindful of the facts that suggest interest rates don't need to move up much at all, such as:

* New Zealand already has relatively high interest rates
* We have had considerable growth without correspondingly high inflation
* The kiwi dollar has settled just above 60 cents US and is more likely to rise than fall because the US current account deficit to GDP is set to rise a maximum 60% in real terms over the next 5 years
* Individual debt at record real levels already puts a brake on more borrowing increasing money supply
* Too high interest rates would lead to a significant fall in property prices as people are forced to cash up to reduce debt
* Inflation remains within the target range
* Our major trading partner, Australia, is undergoing a severe housing price reduction and the same is expected here
* We returned to a net migration loss in March 2004
* The drop in overseas students has lowered pressure on rental housing
* Our housing supply is about to outstrip demand
* China is reining in its breakneck pace economy
* Soaring oil prices are acting like an interest rate rise, dampening growth

"These deflationary conditions are as numerous as the often repeated lists of inflationary ones and a steady hand is called for", said Mr Thompson.


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