The Reserve Bank has left the OCR unchanged at 6.75 per cent.
Reserve Bank Governor Alan Bollard said: “At the March MPS we expressed concern about the persistence of inflation pressures in the economy which were severely limiting our inflation headroom. We still take that view. While recent indicators have shown signs of a slowdown in the second half of 2004, analysis of the data suggests that underlying demand and inflation pressures remain strong. In this environment, further policy tightening cannot be ruled out.
Recent GDP data and business surveys have been difficult to interpret in the context of the economic cycle. Several years of strong growth have led to productive resources becoming stretched, with capacity utilisation and measures of labour shortages remaining at or near record highs. The recent soft GDP outturns may have been affected by these capacity constraints and do not necessarily reflect a weakening of aggregate demand. Recent indicators of demand support this view, with retail trade, housing market data and imports all remaining very robust. Consequently, we expect some rebound in GDP growth over the first half of 2005.
Price data also point to inflation pressures remaining at least as strong as in our March assessment. The March quarter CPI was heavily influenced by temporary factors, such as the large seasonal fall in international airfares. Underlying inflation pressures are persisting, as evidenced by rising business costs and ongoing labour market tightness.
Over the coming weeks we will be reviewing our forecasts in more detail, in particular to assess the strength of pipeline interest and exchange rate effects, household demand and ongoing labour market pressures. This assessment will be used to confirm whether further policy tightening is warranted at the June Monetary Policy Statement. Certainly, the current outlook offers no scope for an easing of policy in the foreseeable future.
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