Bollard picked to play Grinch this Christmas

Reserve Bank Governor Alan Bollard may be forced to play the Grinch next month with a 50 point interest rate hike to king hit housing market and knock the stuffing out of consumer demand.

Deutsche Bank senior economist Darren Gibbs said the bank believed there was a 30 per cent chance of a 50 basis point hike, while BNZ economists put the likelihood at 25 per cent.

A 50 point rise would be twice the size of the other hikes Bollard has made this year. It would take the official cash rate to 7.5 per cent and send floating mortgage rates soaring past the 10 per cent mark.

"My core view is that they won't do it," said Gibbs.

"But I can see reasons why they might. One of those is to well and truly knock the consumer on the head ahead of Christmas, it would be a good time to really drive home the message."

Earl White of Bancorp Treasury Services also believed a 50 point move was a possibility.

"Based on what they've done over the last little while, I wouldn't be completely discounting it that's for sure."

But White warned Bollard would be "very, very silly" to hike by 50 basis points, "especially when he's pretty strident that he wants the currency lower and believes its overvalued".

More rate hikes were in effect, "throwing petrol onto the fire" and would inevitably push the kiwi higher.

"Sooner or later that increased heat may mean that there will be nothing left and we'll just have a scorched rubbish heap in the tradeables (export) sector."

The bank was showing signs of having "lost the plot", White said."They've almost lost control of monetary policy at the moment."

He believed Bollard should have used the strong medicine of a 50 point hike earlier in the tightening cycle, "and rates might have peaked a lot earlier."

"We increasingly look like we're going to repeat the mistakes of the late 1990s and we're going to go up too far which means we're going to go down too far.

"We're still going to be locked into this boom and bust cycle which has dominated New Zealand's monetary policy and economic cycles."

Senior currency strategist at RBC Capital Markets in Sydney Greg Gibbs expected the kiwi to move back up to 70c next month on the strength of another 25 basis point hike.

He didn't see the kiwi going down: "until the world starts becoming more risk averse and starts looking at things like current account deficits".

Meanwhile, the kiwi was nearly as strong as it has ever been on the trad weighted index (TWI).

It continues to find support from cash laden overseas investors lured by New Zealand's high 7 per cent official cash rate (OCR), the product of a string of rate hikes the central bank has made to control inflation.

However, Deutsche Bank's Gibbs said a big move would be unusual for Bollard who has raised rates at a measured pace of 25 basis points a time. "Then again we're in unusual circumstances. One does sense an element of extreme frustration on the part of the RBNZ."

In the Reserve Bank's half yearly financial stability report on Friday, Bollard again warned of economic imbalances in reference to the current account deficit and the heavily indebted household sector.

If world prices for New Zealand export commodities fell, "the New Zealand dollar exchange rate may fall further and faster than expected", he said.

But that's the tune Bollard has been singing for some time to no effect.

The kiwi closed at US68.70c for the week, well down on its post float high earlier this year of more than US74c but little changed in past few days.