Reserve Bank Governor Alan Bollard said: "Recent economic developments have been broadly in line with our June Monetary Policy Statement. However, economic activity has been a little stronger than expected. Indicators of both consumer demand and business activity have not softened to the degree anticipated. We are also seeing slightly more short-term inflation pressure as a result of the continued upward trend in world oil prices. Headline annual CPI inflation reached 4% in the June quarter and is likely to persist around this level for several quarters to come. We remain wary of the risks to inflation expectations presented by these high headline inflation rates.
"Our medium-term view is for underlying inflation pressures to trend downwards. Economic growth is forecast to remain subdued through 2006 and 2007, and CPI inflation is expected to return within the 1-3% target range by late 2007. The rebalancing of economic activity - away from domestic demand and towards exports and import substitution - is expected to continue and will help to alleviate domestic inflation pressures. The rebalancing will be supported by the weaker New Zealand dollar exchange rate and ongoing upward pressure on effective mortgage rates. Foreign interest rate trends and domestic market expectations are both now working to support our domestic policy stance.
"We maintain our view that the current level of the OCR is consistent with returning inflation to the target range. While second-round wage and price effects remain a risk, we do not expect to have to tighten the OCR further in this cycle. However, a sustained period of adjustment in domestic spending is necessary, and it will be some time before an easing in the OCR can be considered. Certainly we will need to be confident that future inflation is heading back comfortably within the target range."
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