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RBNZ's Bollard signals that inflation remains key

RBNZ's Bollard signals that inflation remains key concern

RBNZ Governor Alan Bollard, who spoke in Sydney this morning at the Euromoney Australian Financial Markets Innovation Congress, signalled clearly that while economic growth in New Zealand will moderate going forward, inflation remains strong, and current monetary policy settings are appropriate; this means that a cut to the official interest rate is unlikely anytime soon. Our forecast remains that the RBNZ will leave the cash rate unchanged this year, before lowering the cash rate in 2009.

The RBNZ forecasts a moderation in economic growth in coming years owing to weaker business investment and softening housing consumption; the latter, however, will be supported by personal income tax cuts and rising wages stemming from tight labour market conditions. Government spending and the terms of trade also will provide underlying support for the economy. The RBNZ chief acknowledged also that the growth outlook remains highly dependent on economic growth in New Zealand's key trading partners in the Asia Pacific, though exports may be dampened by still-elevated NZD.

On financial markets, Dr. Bollard said that he will watch global financial markets closely. He said that local credit standards have tightened in response to global developments and financial market volatility has picked up, but that Kiwi banks have little exposure to subprime issues.

On inflation, the Governor said that recent global financial and economic developments have underlined the policy risks facing New Zealand, but that these risks must be balanced against the inflation outlook. Inflation remains a key concern for the RBNZ, especially given that the introduction of an Emissions Trading Scheme will add to headline inflation in coming years. Rising labour costs, elevated energy prices, and global price pressures also remain key sources of inflation. Dr. Bollard added, though, that current monetary policy settings are appropriate, but the RBNZ will watch closely global developments "for any indications that global activity is slowing by more than most forecasters are currently projecting."


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