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RBNZ outlines policy challenges

RBNZ outlines policy challenges

The key message from RBNZ Governor Alan Bollard's speech in Christchurch today was that, in the Governor's opinion, the current level of interest rates in New Zealand is enough to contain inflation.

With inflation likely to run above the bank's 1-3% target range this year, however, Dr. Bollard signalled clearly that an imminent rate cut was unlikely. The Governor said that in the past, global price shocks have posed key policy challenges to the economy - the surge in oil prices, for example - and that, looking ahead, further inflation pressures can be expected to stem from the Emissions Trading Scheme. He attributed many of these challenges to the increasingly influential Chinese economy, alongside other emerging market economies.

The Governor, however, recognized that the most recent challenge to economic growth is the "financial market instability emanating from the sub-prime US mortgage market". He reiterated comments made in the statement accompanying the RBNZ's decision to keep interest rates at a record 8.25% earlier in the week: "Since the December Monetary Policy Statement there has been ongoing turbulence in international financial markets and a deterioration in the outlook for the United States and European economies. We will be watching these developments closely, particularly their implications for the Asian and Australian economies and for world commodity prices."

The RBNZ noted earlier this week noted that the upside risks to inflation outweigh the downside risks to growth. The RBNZ today ruled out stagflation becoming an issue for the Kiwi economy.

Market response: The NZD slipped from $0.7753 to under $0.7690 shortly after the comments. The yield from the 2-year NZ swap shed 8bp.


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