RB slashes rates

Dr Don Brash surprised no-one when he cut interest rates by his now customary 0.25% this morning.

"It is easy to see why virtually all commentators have been expecting another easing of monetary policy," Dr Brash said.

With most of New Zealand¹s major trading partners ­ Australia, the United states, Japan, and the rest of Asia ­ experiencing a downturn, and business and consumer confidence dropping in New Zealand, the cut appeared to be something of a no-brainer.

However New Zealand¹s inflation outlook is not as clear cut as it would appear "it is not yet by any means clear that growth in our main trading partners will continue to be weak next year ­ the time most relevant to what we do with monetary policy today." The world consensus forecasts still point to a considerable pick up in international economic growth in 2002, "and in recent weeks world financial markets also seem to be responding to that prospect."

On top of that the mild slowdown currently under way internationally will not necessarily put downward pressure on inflation, Dr Brash said.

"So far, the world prices of many of New Zealand¹s commodity exports have held up surprisingly well, despite the slowdown in growth of our trading partners, In other words, one of the major channels through which a weaker world economy typically affects New Zealand does not yet appear to be operating as previous experience would suggest."

The other factor preventing New Zealand inflation dropping is a h historically low currency.

While this is helping insulate the New Zealand economy from the world wide slowdown, the resulting stimulus means inflation is of greater concern here than it is in other countries.

A further inflationary pressure is the low unemployment rate, with reports from employers who are unable to find sufficiently skilled staff increasing.

"Monetary conditions are still stimulatory," Dr Brash said. The interest rates were "about neutral", he conceded, although he expressed reluctance to get into a discussion about what a precisely neutral interest rate is. However that "about neutral" rate of 5.75% was matched with an exchange rate which is "very clearly stimulatory," he said.

The New Zealand economy had not grown as fast in recent months as the Reserve Bank expected, he said. Business investment, instead of building on last year¹s rise in activity, had actually declined in the first six months of the year.

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