Official cash rate left unchanged

The Reserve Bank has left the Official Cash Rate (OCR) unchanged at 6.75%.

Thursday, July 28th 2005, 8:59AM

"The economy has recently shown signs of softening. GDP growth has continued to ease over recent quarters, particularly in sectors such as manufacturing that are exposed to the strong exchange rate," Reserve Bank Governor Alan Bollard said.

"Indicators of business activity have been pointing downwards for some months and it now appears that household consumption growth is also beginning to weaken. However, residential housing market indicators remain firm, representing an upside risk for the future path of household spending and inflation.

"We view the overall easing in activity as broadly consistent with our June MPS economic outlook.

"Inflation pressures nevertheless remain present. Several years of strong growth have led to productive resources becoming stretched and the resulting inflation pressures will take some time to unwind.

Moreover, additional short-term inflation pressures have recently emerged as a result of surging oil prices and the waning impact of the strength in the exchange rate over recent years. These short-term inflation pressures, which could easily be exacerbated, are now expected to push CPI inflation temporarily above 3% over the coming quarters.

"Looking further ahead, we expect that current policy settings will be sufficient to achieve our objective of 1-3% inflation on average over the medium term.

However, in the current environment, monetary policy must remain vigilant. We remain vulnerable to upside inflation risks and monetary policy must continue to work at reducing the ongoing excess demand pressures.

A firm policy stance is also necessary to prevent the expected short-term inflation pressures from becoming entrenched in inflation expectations. A further tightening of policy could not be ruled out in the event of a resurgence in medium-term inflation pressures. Certainly there remains no prospect of a policy easing in the foreseeable future."

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