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New Zealand Reserve Bank lifts interest rate to 3 percent

07-29-2010 08:39 BJT

WELLINGTON, July 29 (Xinhua) -- New Zealand's Reserve Bank on Thursday raised the Official Cash Rate (OCR) from 2.75 percent to 3 percent.

The move, though widely expected, is a sign that the economy is still growing enough for central bank governor Alan Bollard to keep winding back the stimulus of record low interest rates, introduced at the height of the global economic crisis.

The OCR was last raised by a similar amount on June 10, the first time it had been increased by the Reserve Bank since 2007.

Central Bank Raises Interest Rate

Bollard listed a range of factors for the increase.

Bollard said the world recovery remains fragile and demand in New Zealand is subdued.

However, the New Zealand economy is still growing.

"While the outlook for economic growth has softened somewhat, it is still appropriate to continue to reduce the extraordinary level of support implemented during the 2008/09 recession," he said in a statement.

"The world economy continues its fragile recovery. Trading partner growth has turned out stronger than we predicted, however, future prospects for growth have deteriorated. While still at high levels, our commodity prices have moderated," he added.

"In New Zealand, domestic demand is subdued. Households are cautious, with retail spending growing only modestly, housing turnover in decline and household credit growth weak. While this caution has been evident for some time, the recent slowing in net immigration will act to further dampen consumer spending. Business investment remains very low, with corporate lending continuing to be subdued," he said.

The New Zealand dollar has appreciated in recent weeks. This appreciation is inconsistent with the softening in New Zealand's economic outlook and moderation in its export commodity prices, he said.

"Overall, we continue to predict respectable near-term GDP growth, with manufacturing confidence remaining elevated and forestry exports continuing to expand. An eventual recovery in business investment will assist growth over the medium term," he said.

"Annual CPI inflation has been near 2 percent for the past five quarters. As the economy grows, inflationary pressures are expected to pick up.

Bollard also noted that the pace and extent of further increases in the OCR will be more moderate than previously expected.

Impact on Business Confidence

Earlier, Business New Zealand said a rise in the OCR would have a greater effect on company confidence than on the actual cost of borrowing.

Business New Zealand Chief executive Phil O'Reilly said that it ' s hard to argue with the logic of what the Reserve Bank is doing.

But, he said, the downside of an increase in the OCR would be less propensity for businesses to hire in the next few months.

Council of Trade Union economist Bill Rosenberg also believes the main impact of a rise would be on confidence. He said there will be a risk of returning to recession.

Trade unions and Federated Farmers have urged the Reserve Bank to keep interest rates low, saying that the economic recovery is not yet strong enough to remove the stimulus of low rates.

A leading business confidence indicator released on Wednesday showed a third consecutive monthly fall, with confidence almost halving since reaching a decade high in February.

Editor:Xiong Qu |Source: Xinhua

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