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Bollard attempts to restore confidence

RBNZ's Bollard attempts to restore confidence, and highlights inflation risks

In an address to the Marlborough Chamber of Commerce earlier today, RBNZ Governor Alan Bollard said that banks and businesses should avoid overreacting to the economic downturn. Instead, they should adopt a cautious approach, rather than reducing lending and investment in response to changing economic conditions.

After enjoying a record period of uninterrupted economic growth, the Kiwi economy "remains fundamentally sound and creditworthy", according to Dr. Bollard, although will endure a "markedly weaker growth profile this year." Indeed, with residential construction contracting steeply in response to the rapidly deteriorating housing market, and private consumption growth moderating at a faster rate then originally anticipated, we have lowered our growth forecasts for the Kiwi economy in 2008. We now expect growth of just 1.9% this year, down from our previous forecast of 2.5%, and well below the 3.1% growth rate recorded in 2007. Furthermore, we forecast that economic growth will stagnate in 2Q, with a significant risk of negative growth in that quarter.

But inflation, it seems, remains a key concern for the RBNZ, meaning that there will be little scope for monetary easing in the foreseeable future, despite the significant slowdown in economic momentum. The Governor cited high dairy prices, the government's expansionary fiscal policy, and elevated wages, as key sources of inflationary pressure. He also highlighted that there will be a significant boost to inflation in 2009 and 2010 from the introduction emissions trading scheme. With annual headline inflation to remain at the very top-end of, or above, the central bank's 1-3% target range for an extended period, we expect the RBNZ to leave the cash rate at a record high 8.25%, at least until 2009.


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