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Reserve Bank A Little More Positive - Maybe

Today's Reserve Bank Monetary Policy Statement carries possibly the least surprises of any MPS to date. As predicted widely New Zealand's risk averse Reserve Bank has decided to raise the Official Cash Rate by 0.5% to 5.75%.

One analyst - who wished to remain anonymous - described the statement this morning as "boldly diffident".

New Zealand's major trading banks have all said they have already factored in the rise in the OCR, and so little market reaction should be expected to the statement this morning.

Overall the Reserve Bank's economic forecasts are a smidgen more optimistic than Treasury's forecasts released last week in the Budget Policy Statement, especially when it comes to the out years in the forecasts, 2002 and 2003.

Where Treasury picked a GDP track through to 2003 of 3.6%, 3.7%, 2.7%, and 2.1% the RBNZ has 3.5%, 3.6%, 3.4% and 3.4%.

The difference appears to be primarily attributed to Reserve Bank assumptions that there will be greater export led growth than expected by Treasury. In addition the Reserve Bank's inflation expectations - particularly for the December 1999 quarter - were not met indicating less inflationary tendencies in the NZ economy than previously thought.

Today's statement is couched in the language we have come to expect from the Reserve Bank, hedging bets and opining in essence that the bank is not entirely sure what the chances of inflation emerging over the coming two years are.

On the one hand we could be "on the cusp of a new paradigm" of strong growth without inflation. On the other we might not be.

"The appropriate strategy for NZ is to acknowledge the new paradigm possibility, but to maintain a cautious stance, while searching for more concrete evidence," the statement concludes.

The problem with this stance - as pointed out by Scoop's anonymous analyst - is that in the meantime because we have raised interest rates already, any evidence that NZ can experience non-inflationary high levels of growth - while maintaining low interest rates - will not be able to emerge.

We may experience growth without inflation but we will never know what might have happened had we not raised those rates. Thus it appears we may remain on this cusp for some time.

In the meantime we can rest assured that although interest rates are going up - this is not because Dr Don has his foot on the brake.

Rather - reusing the metaphor he has been using for the past 12 months - he says he is continuing to ease up on the accelerator.

- See the Business wire for the Governor's press statement, police overview and smmary table of economic projections.

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