OCR unchanged at 6.75 per cent
The Reserve Bank has left the Official Cash Rate (OCR) at 6.75 per cent.
Reserve Bank Governor Alan Bollard said: "Since our June Monetary Policy Statement, economic indicators have broadly
confirmed the slowdown in activity that commenced in the second half of 2004. The slowdown has been concentrated in
sectors such as manufacturing and tourism that have been exposed to the high exchange rate. The non-traded sectors of
the economy on the other hand, such as household and business services and construction, have maintained their high
growth of recent years. The housing market in particular has remained strong, underpinning consumption growth.
Reflecting the slow pullback in domestic demand, capacity and labour shortages are expected to persist well into 2006.
"New developments in oil prices have made the future more uncertain. Oil prices have surged in recent months and are now
20 per cent higher than projected in June, some 60 per cent up from the end of 2004. As a consequence, headline CPI
inflation is now forecast to approach 4 per cent over the next few quarters before returning below 3 per cent by early
2007. Monetary policy will not attempt to offset the unavoidable first-round price effects of the oil price spike.
However, it will be used to resist any flow-through to ongoing price and wage inflation. Further out, the higher oil
prices are expected to have a dampening effect on both world and domestic economic activity, thus taking some pressure
off monetary policy in the medium-term.
"Fiscal policy is also adding to uncertainty. The shape and economic impact of new post-election policies is not clear
at this point. However, it does appear likely that fiscal policy will become more expansionary in the period ahead.
"Right now, it is too early to make a call on the relative strength of the emerging cross-currents and how these will
translate into medium-term inflation pressures. It will be several months before the persistence and global impact of
the oil shock become more apparent. A similar period could be needed for the fiscal outlook to be clarified. We are
concerned, however, that the risk of higher medium-term inflation has increased. Consequently, further monetary policy
tightening may still prove necessary to ensure inflation is kept within the 1 per cent to 3 per cent target band on
average over the medium-term. Certainly there remains no prospect of a cut in the OCR in the foreseeable future."