23 November 2005

Cullen on business confidence

“The decline in business confidence levels is unsurprising given their historic sensitivity to trends in interest rates,” Finance Minister Michael Cullen said today.

Dr Cullen was commenting on the latest National Bank Business Outlook showing sharp drops in both headline confidence and the own activity measure.

“The official cash rate is now at its highest level since the introduction of the OCR mechanism in 1999 and the Governor of the Reserve Bank has been signalling that it may have to go higher yet.

“The Bank reinforced its concerns about the serious imbalances in the economy in its briefing to the incoming government, released yesterday.

“These included: persistent high domestic demand, core inflation knocking 3 per cent, a widening balance of payments deficit, house prices that the Bank considers are reaching levels inconsistent with longer-term fundamentals and an exchange rate at near record highs in trade-weighted terms.

“All of these factors point to a rough landing unless debt financed consumption begins to slow,” Dr Cullen said.

He expressed concern at the impact of the high dollar on the export sector but said the Supplementary Stabilisation Instrument Project, the terms of which were drawn up by the Treasury and the Reserve Bank and released without reference to the government, would explore options to reduce pressure on the exchange rate by reducing monetary policy reliance on the OCR.

ENDS

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