Interest Rates Held - Anxiety Will Lessen

Wednesday, August 14, 2002

Interest Rates Held - Anxiety Will Lessen

Today's announcement by the Reserve Bank keeping the OCR at 5.75 per cent will go some way to dispelling the anxiety building over the high level of New Zealand's interest rates.

"This year the Reserve Bank raised interest rates too rapidly and had signalled this was likely to continue despite the cloudy economic outlook," said Alasdair Thompson, chief executive of the Employers & Manufacturers Association (Northern).

"Today's 'wait and see' will help ease business unease, especially for exporters," Mr Thompson said.

"It's worth recalling the reason that inflation has averaged just under three per cent over the last two years was a result of the unexpected devaluation of our currency when the US dollar soared.

"At the time the Reserve Bank was forecasting slight gains for our dollar whereas it sank rapidly when the US dollar rose.

"The unanticipated devaluation boosted actual inflation as imports, especially transport fuels, became more expensive. If the unforeseen devaluation had not occurred New Zealand's inflation would have been very close to zero.

"We are also concerned the Reserve Bank has put too much emphasis on growth rather than on inflation itself.

"Acting Reserve Bank Governor Rod Carr told a Parliamentary Select Committee (27/5/2002) that he tightens monetary policy to slow the economy when growth rises above three per cent.

"EMA supports the Reserve Bank Act and its objective of price stability with low inflation, but we believe the existing 1.5 per cent midpoint inflation target has restricted growth. Therefore we support a Policy Targets Agreement (PTA) which sets a target of 2.5 per cent over the business cycle, rather than annually, within a range of plus or minus 0.5 per cent.

"This would have the advantage of harmonizing our target with countries like Australia, the UK and the US."

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