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Interest rate cut not increase

-Press release

Thursday 19th July 2007

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Contrary to economists predicting the Reserve Bank will lift interest rates next week, the Auckland Chamber of Commerce believes a strong case can be made to cut the official cash rate (OCR) without adding to inflation pressures.

All the latest evidence is pointing to a deteriorating economy and domestic demand slowing in the period ahead, noted Chamber chief executive Michael Barnett.

Given that the Reserve Banks role is to ensure that inflation outcomes remain consistent with the 1 to 3% inflation on average over the medium term i.e. through to the middle of next year then a clear case exists for the Reserve Bank to force a cut in interest rates when it makes its OCR announcement next Thursday.

The trend line supporting an interest rate cut includes:

Numerous business surveys, including by the Auckland Chamber, expecting business conditions to deteriorate over the coming year.

The huge damage the export sector is suffering and its flow-on impacts to the domestic economy from the record high value of the NZ$ against the US$.

KiwiSaver that started on 1 July will take an increasing amount of money out of the economy in the medium term.

The reduced immigration quota just announced by Government was set specifically to help reduce pressures on house prices.

Fuel prices will rise in line with current overseas trends when the dollar reduces, as it will with a cut in interest rates.

Other than the dairy sector, primary product export prices are either flat or declining and therefore reducing domestic spending demand by farmers.

Construction material and project prices are showing signs of rising and demand flattening, as much from the flow on consequences of higher oil prices affecting industries such as plastics as from the huge skills shortage as well as the reduced demand from lower migration.

Our economic growth and productivity rates are slowing, and by international standards are flat with a widening gap compared to neighbour Australia, and which is making Australia an increasingly attractive market to live and work at a time NZ can least afford the losses.

Finally there is our appalling weather affecting large areas of New Zealand. While there will be increased demand for reparation work, the overwhelming message from businesses affected by our tough winter is that consumers are battening down and keeping their wallets closed.

If there was ever a time for the Reserve Bank to come out with a positive message, it is now, said Barnett.

I hate to predict the consequences of another interest rate rise on the 3-or-4 of the past few months. As things are now, we are chasing our tail and driving ourselves into a death spiral.

If interest rates are increased, this will simply encourage a greater flow of overseas money to seek wind fall gains from New Zealand, attract more cheap imports and so force up spending and inflation pressures, and encourages more businesses to shelve expansion plans or move across the Tasman.

I strongly suggest that the Reserve Bank must factor in the huge damage done to the economy beyond the recent interest rate rises. No one wants inflation getting out of control. I suggest that all the evidence suggests that is very unlikely while the current trends continue over the period ahead.

We have to break the death cycle by sending a very clear message that the NZ interest rate rise cycle has reached its peak, and offshore investors should starting looking elsewhere for their windfall profits, concluded Barnett.

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