Interest rate decision only one possible

Media statement Thursday, October 29, 2009

Interest rate decision only one possible. Recession still with us.

Business is pleased the Reserve Bank has held the line over not raising the Official Cash Rate til mid 2010.

The Employers and Manufacturers Association (Northern) says the OCR must remain at 2.5 per cent until at least June 2010, if not longer.

"We are not out of this recession by a long shot," said Alasdair Thompson, EMA's chief executive.

"The 0.1 per cent increase in GDP last quarter did not mean the economy was back on a growth path. There is no case to raise interest rates.

"Given that net migration has rapidly increased (3100 in September 2009 and 17,000 for the year to September), real GDP per capita continued to decline.

"However the rate at which things were getting worse has leveled off and a further rise in unemployment is working its way through.

"Most SME bank loans are secured against homes with SME's paying the floating rate which is as low as 5.6 per cent. Any increase in that before mid year next would hurt far too many.

"Inflation for the year ended September was a worrying 1.7 per cent with most of that occurring in the September quarter with 1.3 per cent inflation mainly in transport costs, licensing, ACC, vegetables and rates.

"But signaling an earlier rise in the OCR now would invite a flood of cheap dollars via the carry trade from zero interest rate countries such as the US, the UK and Japan.

"That would drive our dollar higher and further aggravate the perilous position of our exporters' sales to those countries.

"In turn that would reduce income to cash strapped farmers and manufacturing exporters, and hurt government tax receipts. It would be a risk not worth taking.

"Its most important now for the government, and all New Zealanders to do everything possible to reduce our huge demand for borrowing foreign money, which means as a nation we have to raise our productivity, and our income from offshore."

ENDS

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