OCR reduced to 5.50 per cent

The Reserve Bank today reduced the Official Cash Rate from 5.75 per cent to 5.50 per cent.

Reserve Bank Governor Alan Bollard commented "In January this year, we said that if the exchange rate remained unchanged or appreciated further, and if the evidence pointed to reduced pressures on resources and medium-term inflation, then there might be scope for a cut in the OCR later in the year. In our judgement, these conditions have now been met.

"The available data suggest that growth in the New Zealand economy is slowing as we projected in our March Monetary Policy Statement. A weak international economy is now being reflected in softer activity in New Zealand's tradable sector. The domestic economy remains relatively robust, especially in the housing market. However, the weaker tradable sector is expected to feed through into reduced domestic demand elsewhere in the economy, as exporters' incomes decline.

"With the passage of time, we are now more confident that inflationary pressures will ease, which is the basis of today's decision. This should not be interpreted as the Bank now having a more pessimistic view of the New Zealand economy, but rather as a consequence of our earlier expectations being confirmed.

"While the economy is progressing as expected, recent dry conditions in some parts of the country, potential electricity shortages and the SARS virus add additional downside risks to the economic outlook, though at this stage we do not expect a large enduring economic impact.

"The Policy Targets Agreement, signed in September last year, requires the Bank to avoid 'unnecessary instability in output, interest rates and the exchange rate'. Based on this, we have been prepared to adjust interest rates a little faster in response to the unfolding evidence of a slowdown. However, any future easings will depend on the evidence still suggesting that inflation will settle comfortably within the target range over the medium term."

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