'Cloud' prompts N.Z. to leave rates on hold


Seeing clouds on the global horizon, New Zealand has left interest rates on hold

By Geoff Hiscock
CNN Asia Business Editor

SYDNEY, Australia (CNN) -- New Zealand left its official cash rate unchanged at 5.75 percent Wednesday, citing the global economy's "increasingly clouded" prospects.

Reserve Bank of New Zealand acting Governor Rod Carr said that while the country's economy had performed well over the past year, the odds of an international slowdown had increased.

He also noted the bank's concerns over high core inflation of around 3 percent.

New Zealand last moved on rates on July 3, when it lifted by a quarter of a percentage point.(Full Story)

Its decision to leave rates on hold Wednesday was widely expected. It came after the U.S. Federal Reserve opted Tuesday to keep its benchmark rate at 1.75 percent, while changing the balance of risks towards weakening.(Full Story)

Follows Australian decision

It also follows the decision by the central bank in neighboring Australia last week to keep the official cash rate steady at 4.75 percent for a second month.

Australia and the United States, along with Japan, are New Zealand's key trading partners.

Carr said that when the bank met in May it looked likely that further rate increases would be needed over the coming year to keep inflation within its target band.

"But that prospect now looks less likely," he said.

"On balance, we feel that current global developments, recent falls in export prices, an exchange rate higher than on average last year, and the lagged effects of the interest rate increases earlier this year are likely to dampen inflation pressures sufficiently going forward."

Carr said the prudent response for New Zealand now was "to pause, and to watch and wait."

Growth forecast upgraded

Long-range economic forecaster BIS-Shrapnel this week upgraded its growth outlook for New Zealand to 2.8 percent in 2002 and 3.3 percent next year.(Full Story)

But BIS Shrapnel also criticized the central bank's action in lifting its cash rate three times between March and May this year, saying it was unclear whether inflation was really getting out of hand.

"What is clear is that the rate rises, and the strength of the New Zealand dollar through 2002, will both crimp the economic recovery as time progresses," it said.

The New Zealand dollar is trading at 45.60 U.S. cents, 1 percent weaker than Tuesday's close of 46.08. The currency hit a recent high of 50.09 on June 24 and a low of 39.52 in April last year.

In line with a general trend across the region, the New Zealand stock market is lower Wednesday, with the NZSE Top 40 down 0.56 percent or 11.357 points to 2018.465.