Thursday 27th January 2005
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Reserve Bank Governor Alan Bollard said "As indicated in our last Monetary Policy Statement, we continue to expect that the current policy position will achieve inflation between 1 and 3% on average over the medium term. This outlook assumes that significant pipeline effects from past interest and exchange rate increases will eventuate and act to further constrain the economy over the period ahead.
"Economic developments are generally proving at least as strong as we anticipated, although a slowdown is still expected over the year ahead. Inflation has risen to close to 3% and is expected to remain around this level before easing back later in 2006. On the upside there is clearly a risk that the current momentum in household demand will hold up longer than expected. Rising wage and salary pressures also present an upside inflation risk given persistent labour market tightness. On the downside there is the possibility of more exaggerated movements in the US dollar and US interest rates, leading to a stronger New Zealand TWI, weaker exports and less inflation pressure.
"The tightening in monetary policy over the past year currently looks sufficient to keep medium term inflation pressures in check. However, with inflation expected to remain toward the top of the 1 to 3% target band over the medium term, there is little headroom to absorb stronger than expected inflation pressures. If such pressures emerge, a further policy tightening cannot be ruled out. Further, the current outlook offers little scope for an easing in policy in the foreseeable future. We will review the situation at the March Monetary Policy Statement."
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