Cullen Says Demand in N.Z. Economy Is `Very Strong'

New Zealand Finance Minister Michael Cullen says demand in the nation's economy is ``very strong'' and the government must be careful not to stimulate it by tax cuts.

``The demand element in the economy remains very strong,'' Cullen told parliament's finance and expenditure select committee in Wellington today. ``The government has to be very aware of the impact of its fiscal position in terms of stimulating further demand over the short term and therefore leading to monetary policy tightening.''

Cullen made the remarks amid expectations Reserve Bank Governor Alan Bollard will raise the benchmark interest rate from a record- high 7.25 percent as soon as next month to cool the housing market and stem consumer demand. On Jan. 25, Bollard said his assumption that housing will slow looked ``uncertain, particularly if further fiscal expansion occurs.''

Cullen announced he will deliver the government's annual budget on May 17. He reiterated he will not be announcing significant personal tax cuts because they would stoke consumer spending.

``There is not scope in this year's budget for large-scale personal tax cuts,'' he said. ``Even NZ$10 a week would be well outside the comfort range of the Reserve Bank. It would not make sense given the situation we are in in terms of the current account, inflationary pressures and the like.''

Interest Rates

Bollard has kept interest rates at 7.25 percent since December 2005. Eleven of 13 economists surveyed by Bloomberg News expect a quarter-point increase when he next reviews rates on March 8.

``Monetary policy not only remains tight, but many people are expecting some further tightening,'' Cullen said. He didn't comment further on rates.

Cullen said there is a ``loose connection'' between higher interest rates and a slowdown in consumer spending and housing because of the volume of fixed-rate home loans in New Zealand.

A reaction to higher rates does happen eventually, but meanwhile ``damage occurs to the export sector'' via a high currency, he said.

``Some may not give a stuff about the export sector. I do,'' Cullen said.

The New Zealand dollar gained 4.2 percent the past three months, the best performing major currency tracked by Bloomberg. It bought 69 U.S. cents at 1:40 p.m. in Wellington from 68.59 cents in late Asian trading yesterday.

source:www.bloomberg.com