20 August 1998

Reserve Bank eases again

The Reserve Bank's easing of monetary policy, underway since December 1996, continued today with the release of the August 1998 Monetary Policy Statement.

The Reserve Bank said that it now viewed a level of around zero on the Monetary Conditions Index (MCI) as appropriate. This was a cut of 350 points from the index level indicated as appropriate back at the time of the May Monetary Policy Statement, and was the largest cut in desired conditions since the Reserve Bank began easing monetary conditions at the end of 1996.

In recent days, actual conditions have settled at around zero on the MCI and the Reserve Bank is not seeking any further easing in monetary conditions at this stage.

Reserve Bank Governor Don Brash said: "The New Zealand economy in the first half of this year has been considerably weaker than we had expected. Also, the outlook for the world economy has weakened further, as the Asian crisis has continued to take its toll. As a result, inflationary pressures are expected to be lower than we thought earlier, allowing for easier monetary conditions.

"From here on, we project further easings into mid 1999, but at a much more modest pace than we've seen recently.

"Moreover, those further easings are clearly conditional on inflationary pressures evolving in the way now projected. With the economy projected to grow quite strongly from early 1999, some measures of inflation already showing some increase, and a risk that we may have under-estimated the effects of the recent depreciation in the New Zealand dollar on prices, there is obviously a chance that we will not be able to accommodate the easing now projected.

"At the same time, the international situation remains fragile. For that reason we will be monitoring the world economy and global financial markets with particular care over the months ahead," Dr Brash concluded.

For further information contact
Paul Jackman
Corporate Affairs Manager
Phone 04 471 3671, home 04 479 5457, pager 026 105 085,
Email jackmanp@rbnz.govt.nz