Interest rate cut overdue

December 2, 2014

Interest rate cut overdue

The Employers and Manufacturers Association has joined the call for an early cut to interest rates.

According to the EMA the Reserve Bank should reduce the Official Cash Rate right away or risk deflation next year when the economy is predicted to slow.

"A year ago we said interest rates did not have to be raised this year and that has proved correct," said Kim Campbell, EMA's chief executive.

"We are concerned the Reserve Bank has paid too much attention to domestic house price rises in Auckland and Christchurch and not enough to the rapid changes in global markets.

"Inflation during the year has scarcely tested the bottom end of the Bank's 1 to 3 per cent inflation target.

"Now inflation is falling further as the costs of producing the $50 billion worth of goods we import decline due to the collapse internationally of the price of oil, steel and other commodities.

"The price of oil especially, which has reduced by at least 30 per cent, is slashing the costs of production and freight worldwide; this is not being adequately factored into domestic inflation forecasts.

"The recovery from the GFC has not been accompanied by inflationary pressures driven by rising demand as has been the case in previous economic cycles.

"This time our fortunes have depended on different vectors than hitherto.

"New Zealand has to a large degree decoupled from the US and Europe where there has yet to be a sustained recovery. Asia and Australia are far more significant to us.

"But helped by higher than necessary interest costs, the cross rates with the US and Australia have remained unduly high which has shredded margins, particularly on our $10 billion export trans Tasman trade.

"In addition, the cost of borrowing internationally is at historically low levels while a global oversupply of skilled low cost labour is depressing the rise in real disposable incomes.

"There are no supply constraints evident in the economy other than in housing. But easily outweighing inflationary effects there are the diminishing costs in real terms of the consumer goods, capital items, industrial supplies and transport fuels we import each year.

"A cut to the OCR is well overdue."

ENDS

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