8 Nov 2013

NZ well-placed despite patchy global economy

8:19 pm on 8 November 2013

Concerns about growth in Europe and America are not expected to undermine New Zealand's expanding economy.

Europe's central bank has cut interest rates in response to weak demand, while signs of slowing consumer spending have shed better-than-expected growth in the United States.

While there are some signs America's economy is slowing, it is in better shape than Europe - which is struggling under high unemployment and weak demand.

That could harm New Zealand through reduced export sales. However, economists do not expect it will have much effect on growth.

They say increasing momentum, fuelled by a construction boom and robust global dairy prices, is expected to force the Reserve Bank to start lifting interest rates in the first half of 2014.

That should keep the dollar high, curbing returns to exporters.

ECB rate at record low

In a surprise move, the European Central Bank cut its benchmark interest rate to a record low of 0.25%, down from 0.5% on Thursday.

ECB president Mario Draghi said the decision to cut rates reflected an outlook of low inflation and economic weakness in the eurozone.

Inflation in the eurozone fell to 0.7% in October - its lowest level since January 2010 - stoking concerns of deflation in some countries, the BBC reports.

Prices in Greece - one of the eurozone members worst hit by the economic crisis - have not risen since July. The ECB's target is to keep inflation just below 2%.

After the announcement of the rate cut, Mr Draghi said the bank expected to see "a prolonged period of low inflation followed by a gradual upward movement towards inflation rates of below but close to 2%", and said the eurozone was seeing "weaker than expected economic activity".

''Accordingly, our stance will remain accommodative as long as necessary," he said.

Mr Draghi reiterated a pledge to keep rates low for the foreseeable future as part of the bank's new policy of offering forward guidance alongside its decisions.

The euro fell sharply against the dollar in response to the decision, dropping more than 1%.

A weaker euro may be a help to the eurozone economy by making European goods cheaper abroad, benefiting exporters.

Also on Thursday, the Bank of England left interest rates unchanged at 0.5% and made no change to its programme of quantitative easing.

The decision came as no surprise as the Bank has said it will not consider a rate rise until the unemployment rate falls below 7%.