Reserve Bank cuts interest rate

9.30 am

The Reserve Bank has cut its benchmark interest rate by one quarter of one per cent, to 6.25 per cent, in the first change to the Official Cash Rate since May 2000.

The announcement came with the release of the bank's quarterly monetary policy statement at 9 am today.

The Governor of the Reserve Bank, Dr Don Brash, said it now appeared inflation pressures in the medium term were more likely to ease than to build.

"For one thing, it now seems likely that headline inflation will retreat from 4 per cent quite quickly, reducing the risk of a spill-over into wage- and price-setting behaviour," he said.

"For another, and more importantly, the international economy is slowing down faster than we previously thought. That slowdown will in time impact on our strongly performing export sector, and consequently ease inflation pressure."

Dr Brash warned that today's reduction in the interest rate did not mean further reductions were inevitable, as there were still risks that inflation would turn out to be more persistent than projected in today's statement.

"At this stage, we do not know how severe the international slowdown may be, or how long it might last. ... If the slowdown turns out to be relatively brief, or if New Zealand's export prices hold up despite that slowdown, any substantial easing of monetary policy in New Zealand would be quite inappropriate."

Dr Brash noted that there were particular factors within New Zealand that had made the Reserve Bank especially cautious.

"Significant parts of the economy are operating at close to capacity. Fuelled by a still-stimulatory exchange rate and relatively buoyant commodity prices, many companies are stretched."

Links:

Full text: RBNZ Monetary Policy Statement