Interest rates due half per cent cut

Interest rates due half per cent cut

Today's inflation outturn of zero for the June quarter indicates the economy is slowing faster than previously thought. It should allow the Reserve Bank ample room to cut the official interest rate by a full 0.5% next week, according to the Employers & Manufacturers Association (Northern).

"Our interest rates are the highest in the developed world at present," said Alasdair Thompson, EMA's chief executive.

"Its no wonder offshore fund managers place short term money here; they're fuelling the fire under our currency more than our economic performance warrants.

"All the signs favour a meaningful half per cent cut in the OCR next week.

"CPI inflation for the year ended June at 1.5% was bang in the middle of the Reserve Bank's comfort zone of 1-3% inflation per annum with any risk rapidly receding.

"Zero inflation in the June quarter is well below economists' consensus forecasts, and well below the 0.4 per cent expected by the Reserve Bank itself.

"Several forecasters have already noted the Reserve Bank has room to move the OCR down by up to a full percentage point by the year's end.

"A 'soft' landing for the economy would be underwritten, for exporters in particular, from a cut of 0.5% now rather than the gradualism of three or four more steps of 0.25%.

"The outlook for export income is serious. Exports were 10% down compared to the previous year ended May, with manufactured exports 11% lower and dairy export receipts 18% down.

"Though the currency positions of large exporters (and importers) have been hedged, these periods of cover are running out. Export incomes in real terms face crunch time. The cost of imports should also noticeably fall.

"The construction sector has reached a plateau of strong ongoing activity but capacity constraints are no longer rising.

"A 0.5% cut in the OCR next Thursday would go some way to shoring up business confidence."

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