Monetary Policy Statement for March 1999

Release date
17/03/1999
Main file

Policy assessment

The Bank has decided to set the first Official Cash Rate at 4.50 per cent.

This setting is broadly consistent with current monetary conditions. Given our current assessment of how inflation pressures will evolve over the next two or three years, we do not at this stage see any need for a material change in the stance of policy for some quarters ahead.

As subsequent chapters explain, we estimate that the domestic economy is currently growing at roughly its long-term sustainable growth rate of about three per cent per annum - in other words, at quarterly growth rates which are broadly similar to the rate at which new productive resources are becoming available. We expect that growth over the next few years will be quite moderate compared with that experienced as we came out of recession in the early nineties, in large part because of the very much higher levels of household sector debt at this time. If this proves to be correct, it seems likely that it will be some time yet before the slack built up in the economy over the last year or so has been used up, with downward pressure on trend inflation persisting until that point.

Internationally, we see average growth in our trading partners picking up over the next two years, with slowing growth in the United States and Australia being offset by a pick-up in growth in some other markets. But this international growth will not be as robust as that experienced in the early nineties, and we expect to see continued weak prices for both our exports and our imports. This too will tend to keep inflation at low levels.

There are clearly some important risks in this assessment and, as always, events may turn out rather differently than now projected. Two risks seem particularly relevant, one suggesting inflationary pressures could be rather stronger than now expected, the other suggesting weaker inflationary pressures.

Inflationary pressures could turn out to be stronger than now anticipated if we are wrong about the attitude of New Zealanders to taking on more debt - in other words, if currently low interest rates encourage people to take on even more debt than the relatively high level already carried. In this event, consumption spending and possibly housing investment will be stronger than now expected, with resultant pressures on both inflation and the balance of payments deficit.

On the other hand, inflationary pressures could well turn out to be weaker than now expected if growth in our trading partners turns out to be weaker. That could occur, for example, as a result of a slowdown in the growth of US consumption expenditure - perhaps triggered by a correction in US equity prices - or as a result of further difficulties in the Japanese economy.

As always, we are committed to adjusting policy as necessary in the light of actual developments. As always, we are committed to keeping CPIX inflation above zero and below three per cent, as required by the Policy Targets Agreement.

Donald T Brash
Governor