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Inflation likely to stymie rate cut

Published: 9:58AM Tuesday June 06, 2006 Source: RNZ/TVNZ Interactive

The Reserve Bank of New Zealand releases its latest Monetary Policy Statement on Thursday, with most expecting it to leave official rates unchanged at 7.25% as inflation pressures hover.

The Australian Reserve Bank will also review interest rates this week. It meets on Wednesday. The RBA raised its rate to 5.75% on May 3.

Most commentators agree there's little prospect of New Zealand rates dropping any time soon, with inflationary pressures remaining despite economic slowdown.

But even if there's no change, there's strong interest in what language the bank will adopt and its outlook for inflation.

Bank of New Zealand senior markets economist Craig Ebert expects inflation probably won't start falling until mid 2007, with the bank likely to start cutting rates in March.

Meanwhile, Westpac senior economist Nick Tuffley says it will take time to get inflation back under control.

He says managing people's inflation expectations will be critical because when people expect high inflation it tends to translate into higher wage demands.

The central bank raised its cash rate by 2.25 percentage points between January 2004 and last December.