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The BNZ says the latest hike in the official cash rate will raise floating mortgage rates but is unlikely to slow down the economy.
Reserve Bank governor Alan Bollard delivered a further crushing blow to the fortunes of prospective home buyers and exporters when he raised the Official Cash Rate (OCR) this morning by 25 basis points to a new high of 7.75 per cent.
In announcing the raise, Bollard this morning cited inflationary pressure from the housing market, strong domestic demand and government spending.
The BNZ said that while the New Zealand dollar is exceptionally high by historical standards, farmers are getting good prices for exports and more tourists are visiting the country.
BNZ Chief Economist Tony Alexander said controlling the interest rate is the only tool at the Reserve Bank's disposal.
Green Party co-leader Russel Norman also today said the OCR was too blunt a tool and was exacerbating imbalances in the economy by driving up the New Zealand dollar.
He called for changes to tax rules on property, including a cpaital gains tax, and wants a ban on land sales to non-resident foreigners.
"These measures combined offer the hope of stabilising the housing market," Dr Norman said.
"This would take pressure off interest rates and hence the New Zealand dollar and the productive sector."
The Wellington Regional Chamber of Commerce is also calling on the Government to take more responsibility for reducing inflationary pressures.
Chamber chief executive Charles Finny points to increased Government expenditure as having a big role in pushing up inflation.
Today's increase, expected by a narrow majority of economists, is the second in two months and maintains New Zealand's official interest rates as the highest in the developed world.
However, several economists polled following this morning's announcement said they felt that having delivered today's message to New Zealand consumers, Dr Bollard may now be content to "sit back and watch" how the economy reacts.
The Reserve Bank said recent economic indicators had confirmed a resurgence in economic activity that began late last year had continued over recent months, with domestic demand continuing to expand strongly.
"As we noted in March, demand is being fuelled by a buoyant housing market, increases in government expenditure, a rising terms of trade, ongoing net immigration, and a robust labour market."
While data out last week showed headline for the year to March at 2.5 per cent, was easily within the Reserve Bank's 1-3 per cent target band, non tradeables or domestic inflationwas up to 4.1 per cent, a sign that domestic demand remains strong.
Recent housing data has also printed strongly.
The bank said that lift in domestic demand was placing further pressure on already-stretched productive resources.
"Firms report that capacity is very stretched and that they are again experiencing increased difficulty in finding both skilled and unskilled staff."
The kiwi dollar, which hit a 22 year post float high of US74.93c a week ago and was trading around US74.40c immediately before the announcement, initially dipped by about 10 basis points on the news but began to head higher and was trading at US74.60c 15 minutes after the 9am release.
The bank said recent rises by the New Zealand dollar against the currencies of our major trading partners would "exert some downward pressure on medium-term inflation," and it also noted recent increases in fixed mortgage interest rates.
However it said today's increase was aimed at ensuring that inflation outcomes remained consistent with achieving its target of 1 to 3 per cent inflation "on average over the medium term".
The bank noted that the exchange rate was now at levels that are both "exceptional by historical standards, and unjustified on the basis of medium-term fundamentals".
"Parts of the export sector continue to face challenging conditions, but the recent sharp lift in world dairy prices is expected to provide a boost to incomes in that sector and tourist arrivals are continuing to grow."
- additional reporting by nzherald staff, NZPA, Newstalk ZB
