Reserve reports on economy

The Reserve Bank released its semi-annual statement on monetary policy yesterday, signalling that the economy was growing more strongly than had been expected, and that monetary policy was on hold for the moment.

The Reserve, while still predicting a slowdown in growth towards the end of 1999, warned that growth could be surprisingly strong, in much the same way previous prophesies of doom had been quashed. The report said “the current buoyancy of asset markets, and business and household confidence, point to the possibility that this forecast, like earlier ones, could turn out to be too pessimistic.”

The main factor that the Reserve identified as driving the economy was the continued strong growth in household consumption, which has grown by over 9.8 per cent over the last year. The Reserve attributed the strength in consumption to the strong gains made both on the stock market and in real estate.

However, the Reserve also flagged a startling decline in household saving, which has decreased from about 12 per cent of earnings in the 1980’s to 0.8 per cent at the end of 1998. This was seen as a concern to the Reserve, especially if household saving fell even further, as it gives very little leeway should interest rates move up.

So, all in all, a very positive report from the Reserve Bank, which has fairly much completely ruled out any chance of a rate cut. Most analysts now agree that interest rates will not move in the near future, and that when they do move, it will more than likely be up.