15 August 2001
The Reserve Bank today left the Official Cash Rate unchanged at 5.75 per cent.
Speaking at the release of the Reserve Bank's August Monetary Policy Statement, Dr Brash said "Reasonable estimates suggest that so far the `underlying trend in prices' remains well within the target range and, on present assumptions, the CPI should track back to somewhere near the middle of our inflation target by mid next year.
"But, there are risks to that relatively benign assessment.
"Inflation could turn out to be more persistent than currently seems likely. There are an increasing number of indicators suggesting that the economy may be operating slightly above full capacity. Also, if headline inflation remains close to the top of the target range, the risk is that inflation expectations may go up, leading to adverse consequences for wage- and price-setting.
"Indeed, with businesses confident about the outlook for their own activity, rural sector incomes at their highest level in many years, employment intentions at near-record levels, and strong signs of a pick-up in both confidence and activity in residential construction - previously one of the most sluggish parts of the economy - we have no reason to date to regret the relatively cautious manner in which we have reduced the Official Cash Rate in recent months.
"The current situation would point to an early increase in the Official Cash Rate were it not for the risk that the international environment will turn out to be even weaker than assumed. The flow of economic indicators from the United States, Japan, non-Japan Asia and Europe makes a deeper and more prolonged slowdown seem quite likely. If the international environment were to turn out substantially weaker than our projections have allowed, there seems little doubt that the disinflationary pressures on New Zealand coming from overseas would intensify. As a result, inflation could fall into the bottom half of our target range and this would necessitate further easing of monetary policy.
"Given the balance of risks that the Bank faces, leaving the Official Cash Rate unchanged seems appropriate for the moment," Dr Brash concluded.
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Ph 04 471 3671, 021 497 418, home 04 938 8177, Jackmanp@rbnz.govt.nz