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Interest Rate Rise Threatens Recession

Today's interest rate rise could easily tip us into recession, the Employers & Manufacturers Association says.

"We have to ask whether Dr Cullen and Dr Brash are getting two sets of contradictory data," said Alasdair Thompson, the EMA's chief executive.

"Dr Cullen yesterday said the economy was showing zero growth in the March quarter yet Dr Brash responds, presumably to similar data, by hiking interest rates by a full half per cent.

"Dr Brash is mostly targeting the US dollar with interest rates to control inflation, and the exchange rate has not been responding.

"In fact our trade weighted index has not fallen; the fall in our dollar's value more fairly reflects the strength of the US currency. Meanwhile exporters to our most important market, Australia, are losing orders over there and market share here as our dollar has been rising against the Australian currency.

"The reliance on interest rates alone shows how limited and crude our monetary policy is.

"The Government's contribution to inflation with tobacco tax, ongoing tertiary fee rises, and general uncertainty hanging over our economy, is not helping. Neither are rates rises from local government. "The higher cost of money will certainly put the brakes on investment in new production capacity, but not on the sinking kiwi dollar.

"The last round of interest rate rises resulted in the exchange rate going down. The consensus of our trading bank economists just six weeks ago was that we would get US52 cents for our dollar by now; instead its 47cents as of yesterday.

"How do they get it so wrong? Meanwhile the banks are reporting record profits as are other services.

"The Reserve Bank is in a dilemma now. It has run out of rope with this latest interest rate rise. The alternative today was to leave interest rates where they were, and take a risk on our currency stabilising. Clearly Dr Brash believes the risk of recession is the lesser of the two evils."

ends

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